e10vq
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
COMMISSION FILE NUMBER: 001-33865
Triple-S Management Corporation
     
Puerto Rico    
(State or other jurisdiction of     66-0555678
incorporation or organization)   (I.R.S. Employer Identification No.)
     
1441 F.D. Roosevelt Avenue
San Juan, Puerto Rico
  00920
(Address of principal executive offices)   (Zip code)
(787) 749-4949
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
         
Title of each class   Outstanding at October 31, 2010  
Common Stock Class A, $1.00 par value
    9,042,809  
Common Stock Class B, $1.00 par value
    20,101,005  
 
 

 


 

Triple-S Management Corporation
FORM 10-Q
For the Quarter Ended September 30, 2010
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 EX-10.4
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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Part I – Financial Information
Item 1. Financial Statements
Triple-S Management Corporation
Consolidated Balance Sheets (Unaudited)
(Dollar amounts in thousands, except per share data)
                 
    September 30,     December 31,  
    2010     2009  
Assets
               
 
               
Investments and cash:
               
Equity securities held for trading, at fair value
  $ 46,228     $ 43,909  
Securities available for sale, at fair value:
               
Fixed maturities
    1,023,469       918,977  
Equity securities
    73,241       64,689  
Securities held to maturity, at amortized cost:
               
Fixed maturities
    15,266       15,794  
Policy loans
    6,064       5,940  
Cash and cash equivalents
    50,679       40,376  
 
           
 
               
Total investments and cash
    1,214,947       1,089,685  
Premiums and other receivables, net
    315,092       272,932  
Deferred policy acquisition costs and value of business acquired
    142,444       139,917  
Property and equipment, net
    74,170       68,803  
Deferred tax asset
    28,869       37,551  
Other assets
    30,084       39,816  
 
           
Total assets
  $ 1,805,606     $ 1,648,704  
 
           
Liabilities and Stockholders’ Equity
               
 
               
Claim liabilities
    423,819       360,446  
Liability for future policy benefits
    232,727       222,619  
Unearned premiums
    92,489       108,342  
Policyholder deposits
    48,215       47,563  
Liability to Federal Employees’ Health Benefits Program (FEHBP)
    16,029       13,002  
Accounts payable and accrued liabilities
    139,640       139,161  
Deferred tax liability
    15,215       11,088  
Borrowings
    166,124       167,667  
Liability for pension benefits
    36,709       41,044  
 
           
Total liabilities
    1,170,967       1,110,932  
 
           
 
               
Stockholders’ equity:
               
Common stock Class A, $1 par value. Authorized 100,000,000 shares; issued and outstanding 9,042,809 at September 30, 2010 and December 31, 2009
    9,043       9,043  
Common stock Class B, $1 par value. Authorized 100,000,000 shares; issued and outstanding 20,101,005 and 20,110,391 shares at September 30, 2010 and December 31, 2009, respectively
    20,101       20,110  
Additional paid-in capital
    160,224       159,303  
Retained earnings
    407,629       360,892  
Accumulated other comprehensive income (loss)
    37,642       (11,576 )
 
           
Total stockholders’ equity
    634,639       537,772  
 
           
Total liabilities and stockholders’ equity
  $ 1,805,606     $ 1,648,704  
 
           
See accompanying notes to unaudited consolidated financial statements.

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Triple-S Management Corporation
Consolidated Statements of Earnings (Unaudited)
(Dollar amounts in thousands, except per share data)
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Revenues:
                               
Premiums earned, net
  $ 496,511     $ 476,269     $ 1,493,449     $ 1,390,778  
Administrative service fees
    10,195       9,797       34,859       29,982  
Net investment income
    12,794       12,955       37,888       38,856  
 
                       
Total operating revenues
    519,500       499,021       1,566,196       1,459,616  
 
                       
Net realized investment gains (losses):
                               
Total other-than-temporary impairment losses on securities
    (316 )     (240 )     (2,932 )     (5,953 )
Net realized gains, excluding other-than-temporary impairment
                               
losses on securities
    3       2,390       2,673       4,751  
 
                       
Total net realized investment gains (losses)
    (313 )     2,150       (259 )     (1,202 )
 
                       
Net unrealized investment gain on trading securities
    4,611       4,860       631       8,036  
Other income, net
    576       67       404       392  
 
                       
Total revenues
    524,374       506,098       1,566,972       1,466,842  
 
                       
 
                               
Benefits and expenses:
                               
Claims incurred
    421,514       412,392       1,272,180       1,201,148  
Operating expenses
    74,111       71,205       227,702       208,060  
 
                       
Total operating costs
    495,625       483,597       1,499,882       1,409,208  
Interest expense
    3,026       3,338       9,626       9,959  
 
                       
Total benefits and expenses
    498,651       486,935       1,509,508       1,419,167  
 
                       
Income before taxes
    25,723       19,163       57,464       47,675  
 
                       
 
                               
Income tax expense (benefit):
                               
Current
    6,040       2,096       14,461       11,637  
Deferred
    (805 )     (1,017 )     (3,734 )     (4,638 )
 
                       
Total income taxes
    5,235       1,079       10,727       6,999  
 
                       
Net income
  $ 20,488     $ 18,084     $ 46,737     $ 40,676  
 
                       
Basic net income per share
  $ 0.70     $ 0.62     $ 1.61     $ 1.37  
 
                               
Diluted net income per share
  $ 0.70     $ 0.62     $ 1.60     $ 1.37  
See accompanying notes to unaudited consolidated financial statements.

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Triple-S Management Corporation
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) (Unaudited)
(Dollar amounts in thousands, except per share data)
                 
    2010     2009  
Balance at January 1
  $ 537,772     $ 485,099  
Share-based compensation
    1,301       3,231  
Grant of restricted Class B common stock
    15       27  
Repurchase and retirement of common stock
    (404 )     (22,034 )
Comprehensive income (loss):
               
Net income
    46,737       40,676  
Net unrealized change in fair value of available for sale securities, net of taxes
    48,332       20,299  
Defined benefit pension plan:
               
Actuarial loss, net
    1,089       1,103  
Prior service credit, net
    (203 )     (207 )
 
           
Total comprehensive income
    95,955       61,871  
 
           
Balance at September 30
  $ 634,639     $ 528,194  
 
           
See accompanying notes to unaudited consolidated financial statements.

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Triple-S Management Corporation
Consolidated Statements of Cash Flows (Unaudited)
(Dollar amounts in thousands, except per share data)
                 
    Nine months ended  
    September 30,  
    2010     2009  
Cash flows from operating activities:
               
 
               
Net income
  $ 46,737     $ 40,676  
 
               
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    10,605       6,358  
Net amortization of investments
    2,399       544  
Provision for doubtful receivables
    6,721       10,070  
Deferred tax benefit
    (3,734 )     (4,638 )
Net realized investment loss on sale of securities
    259       1,202  
Net unrealized gain on trading securities
    (631 )     (8,036 )
Share-based compensation
    1,316       3,258  
Proceeds from trading securities sold:
               
Equity securities
    3,441       2,923  
Acquisition of securities in trading portfolio:
               
Equity securities
    (4,931 )     (3,206 )
(Increase) decrease in assets:
               
Premium and other receivables, net
    (42,574 )     (25,214 )
Deferred policy acquisition costs and value of business acquired
    (2,527 )     (7,952 )
Other deferred taxes
    7,347       (11,150 )
Other assets
    3,673       7,904  
Increase (decrease) in liabilities:
               
Claim liabilities
    63,373       54,087  
Liability for future policy benefits
    10,108       11,747  
Unearned premiums
    (15,853 )     (14,148 )
Policyholder deposits
    487       568  
Liability to FEHBP
    3,027       2,858  
Accounts payable and accrued liabilities
    (2,223 )     (1,197 )
 
           
Net cash provided by operating activities
    87,020       66,654  
 
           
(Continued)

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Triple-S Management Corporation
Consolidated Statements of Cash Flows (Unaudited)
(Dollar amounts in thousands, except per share data)
                 
    Nine months ended  
    September 30,  
    2010     2009  
Cash flows from investing activities:
               
 
               
Proceeds from investments sold or matured:
               
Securities available for sale:
               
Fixed maturities sold
  $ 48,193     $ 125,951  
Fixed maturities matured/called
    97,067       151,898  
Equity securities
    16,791       6,849  
Securities held to maturity:
               
Fixed maturities matured/called
    1,852       6,893  
Acquisition of investments:
               
Securities available for sale:
               
Fixed maturities
    (199,809 )     (294,628 )
Equity securities
    (22,436 )     (3,209 )
Fixed maturity securities held to maturity
    (1,050 )     (577 )
Net outflows for policy loans
    (124 )     (285 )
Net capital expenditures
    (13,678 )     (14,555 )
 
           
Net cash used in investing activities
    (73,194 )     (21,663 )
 
           
 
               
Cash flows from financing activities:
               
 
               
Change in outstanding checks in excess of bank balances
    (2,458 )     (11,903 )
Repayments of long-term borrowings
    (1,230 )     (1,230 )
Repurchase and retirement of common stock
          (22,034 )
Proceeds from policyholder deposits
    7,740       3,708  
Surrenders of policyholder deposits
    (7,575 )     (4,929 )
 
           
Net cash used in financing activities
    (3,523 )     (36,388 )
 
           
Net increase in cash and cash equivalents
    10,303       8,603  
 
               
Cash and cash equivalents:
               
Beginning of period
    40,376       46,095  
 
           
End of period
  $ 50,679     $ 54,698  
 
           
See accompanying notes to unaudited consolidated financial statements.

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
(1) Basis of Presentation
     The accompanying consolidated interim financial statements prepared by Triple-S Management Corporation and its subsidiaries are unaudited. In this filing, the “Corporation”, the “Company”, “TSM”, “we”, “us” and “our” refer to Triple-S Management Corporation and its subsidiaries. The consolidated interim financial statements do not include all of the information and the footnotes required by accounting principles generally accepted in the U.S. (GAAP) for complete financial statements. These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009.
     Certain amounts in the 2009 consolidated statement of earnings were reclassified to conform to the 2010 presentation.
     In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for a fair statement of such consolidated interim financial statements have been included. The results of operations for the three months and nine months ended September 30, 2010 are not necessarily indicative of the results for the full year.
(2) Recent Accounting Standards
     In April 2010, the FASB issued guidance to address the classification of an employee share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. The guidance clarifies that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, such an award should not be classified as a liability if it otherwise qualifies as equity. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2010. We do not expect the adoption of this guidance to have an impact on our financial position or results of operations.
     In October 2010, the FASB issued guidance to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. This guidance specifies that the following costs incurred in the acquisition of new and renewal contracts should be capitalized: (1) Incremental direct costs of contract acquisition. Incremental direct costs are those costs that result directly from and are essential to the contract transaction and would not have been incurred by the insurance entity had the contract transaction not occurred. (2) Certain costs related directly to the following acquisition activities performed by the insurer for the contract: a. Underwriting, b. Policy issuance and processing, c. Medical and inspection, and c. Sales force contract selling. Advertising costs should be included in deferred acquisition costs only if the capitalization criteria in the direct-response advertising guidance in Subtopic 340-20, Other Assets and Deferred Costs— Capitalized Advertising Costs, are met. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2011. We do not expect the adoption of this guidance to have a significant impact on our financial position or results of operations.
     Other than the accounting pronouncement disclosed above, there were no other new accounting pronouncements issued during the nine months ended September 30, 2010 that could have a material impact on the Corporation’s financial position, operating results or financials statement disclosures.
(3) Segment Information
     The operations of the Corporation are conducted principally through three business segments: Managed Care, Life Insurance, and Property and Casualty Insurance. The Corporation evaluates performance based primarily on the operating revenues and operating income of each segment. Operating revenues include premiums earned, net, administrative service fees and net investment income. Operating costs include claims incurred and operating expenses. The Corporation calculates operating income or loss as operating revenues less operating costs.

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
     Our Managed Care segment is engaged in the sale of managed care products to the Commercial, Medicare and Medicaid market sectors. Through the Medicaid market sector, the government of Puerto Rico (the government) provides health coverage to medically indigent citizens in Puerto Rico, as defined by the laws of the Commonwealth of Puerto Rico. Up to September 30, 2010, our Managed Care subsidiary, Triple-S Salud, Inc. (“TSS”) provided managed care services to Medicaid members in the North and Southwest regions on a fully-insured basis and in the Metro-North region on an Administrative Service Only (ASO) basis. The current contracts between the Government and Triple-S for the provision of services to the Medicaid population of Puerto Rico expired by their own terms on September 30, 2010, thus effective October 1st, 2010 we no longer provide services to these members.
     The following tables summarize the operations by major operating segment for the three months and nine months ended September 30, 2010 and 2009:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Operating revenues:
                               
Managed Care:
                               
Premiums earned, net
  $ 445,514     $ 427,332     $ 1,340,261     $ 1,244,033  
Administrative service fees
    10,195       9,798       34,859       29,983  
Intersegment premiums /service fees
    1,649       1,533       4,717       4,481  
Net investment income
    5,225       5,435       15,262       15,953  
 
                       
Total managed care
    462,583       444,098       1,395,099       1,294,450  
 
                       
Life Insurance:
                               
Premiums earned, net
    26,606       24,645       78,410       74,198  
Intersegment premiums
    99       108       293       293  
Net investment income
    4,467       4,093       12,913       12,480  
 
                       
Total life insurance
    31,172       28,846       91,616       86,971  
 
                       
Property and Casualty Insurance:
                               
Premiums earned, net
    24,391       24,293       74,778       72,547  
Intersegment premiums
    153       153       460       460  
Net investment income
    2,594       2,998       8,197       8,783  
 
                       
Total property and casualty insurance
    27,138       27,444       83,435       81,790  
 
                       
Other segments — intersegment service revenues *
    12,452       13,889       40,127       39,003  
 
                       
Total business segments
    533,345       514,277       1,610,277       1,502,214  
TSM operating revenues from external sources
    508       427       1,516       1,639  
Elimination of intersegment premiums
    (1,901 )     (1,794 )     (5,470 )     (5,234 )
Elimination of intersegment service fees
    (12,452 )     (13,889 )     (40,127 )     (39,003 )
 
                       
Consolidated operating revenues
  $ 519,500     $ 499,021     $ 1,566,196     $ 1,459,616  
 
                       
 
*   Includes segments that are not required to be reported separately. These segments include the data processing services organization as well as the third-party administrator of managed care services.

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Operating income:
                               
Managed care
  $ 16,417       10,098     $ 47,532       32,080  
Life insurance
    4,529       3,992       13,055       10,938  
Property and casualty insurance
    2,242       245       3,311       4,394  
Other segments *
    476       451       974       813  
 
                       
Total business segments
    23,664       14,786       64,872       48,225  
TSM operating revenues from external sources
    508       427       1,516       1,638  
TSM unallocated operating expenses
    (2,678 )     (2,178 )     (7,102 )     (6,648 )
Elimination of TSM intersegment charges
    2,381       2,389       7,028       7,193  
 
                       
Consolidated operating income
    23,875       15,424       66,314       50,408  
Consolidated net realized investment gains (losses)
    (313 )     2,150       (259 )     (1,202 )
Consolidated net unrealized gain on trading securities
    4,611       4,860       631       8,036  
Consolidated interest expense
    (3,026 )     (3,338 )     (9,626 )     (9,959 )
Consolidated other income, net
    576       67       404       392  
         
Consolidated income before taxes
  $ 25,723       19,163     $ 57,464       47,675  
 
                       
 
                               
Depreciation expense:
                               
Managed care
    2,767       1,364       8,157       4,092  
Life insurance
    173       181       510       491  
Property and casualty insurance
    485       378       1,290       1,128  
 
                       
Total business segments
    3,425       1,923       9,957       5,711  
TSM depreciation expense
    216       216       648       647  
 
                       
Consolidated depreciation expense
  $ 3,641       2,139     $ 10,605       6,358  
 
                       
 
*   Includes segments that are not required to be reported separately. These segments include the data processing services organization as well as the third-party administrator of managed care services.

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
                 
    September 30,     December 31,  
    2010     2009  
Assets:
               
Managed care
  $ 850,114     $ 746,674  
Life insurance
    538,427       487,290  
Property and casualty insurance
    353,416       351,793  
Other segments *
    12,594       14,193  
 
           
Total business segments
    1,754,551       1,599,950  
 
           
Unallocated amounts related to TSM:
               
Cash, cash equivalents, and investments
    55,817       39,029  
Property and equipment, net
    20,929       21,577  
Other assets
    16,170       4,780  
 
           
 
    92,916       65,386  
 
           
Elimination entries-intersegment receivables and others
    (41,861 )     (16,632 )
 
           
Consolidated total assets
  $ 1,805,606     $ 1,648,704  
 
           
 
*   Includes segments that are not required to be reported separately. These segments include the data processing services organization as well as the third-party administrator of managed care services.

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Table of Contents

Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
(4) Investment in Securities
     The amortized cost for debt securities and cost for equity securities, gross unrealized gains, gross unrealized losses, and estimated fair value for trading, available-for-sale and held-to-maturity securities by major security type and class of security at September 30, 2010 and December 31, 2009, were as follows:
                                 
    September 30, 2010  
            Gross     Gross        
            unrealized     unrealized     Estimated  
    Cost     gains     losses     fair value  
Trading securities:
                               
Equity securities
  $ 43,763     $ 7,844     $ (5,379 )   $ 46,228  
                                 
    December 31, 2009  
            Gross     Gross        
            unrealized     unrealized     Estimated  
    Cost     gains     losses     fair value  
Trading securities:
                               
Equity securities
  $ 42,075     $ 7,064     $ (5,230 )   $ 43,909  
                                 
    September 30, 2010  
            Gross     Gross        
    Amortized     unrealized     unrealized     Estimated  
    cost     gains     losses     fair value  
Securities available for sale:
                               
Fixed maturities:
                               
Obligations of government- sponsored enterprises
  $ 188,641     $ 13,087     $     $ 201,728  
U.S. Treasury securities and obligations of U.S. government instrumentalities
    47,621       8,345             55,966  
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
    160,529       4,926       (164 )     165,291  
Municipal securities
    200,290       13,541       (62 )     213,769  
Corporate bonds
    102,925       13,701             116,626  
Residential mortgage-backed securities
    13,912       843       (2 )     14,753  
Collateralized mortgage obligations
    248,036       7,574       (274 )     255,336  
 
                       
Total fixed maturities
    961,954       62,017       (502 )     1,023,469  
Equity securities:
                               
Common stocks
    900       2,786             3,686  
Preferred stocks
    4,298       73       (526 )     3,845  
Perpetual preferred stocks
    1,000             (79 )     921  
Mutual funds
    60,819       5,114       (1,144 )     64,789  
 
                       
Total equity securities
    67,017       7,973       (1,749 )     73,241  
 
                       
Total
  $ 1,028,971     $ 69,990     $ (2,251 )   $ 1,096,710  
 
                       

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
                                 
    December 31, 2009  
            Gross     Gross        
    Amortized     unrealized     unrealized     Estimated  
    cost     gains     losses     fair value  
Securities available for sale:
                               
Fixed maturities:
                               
Obligations of government- sponsored enterprises
  $ 252,513     $ 2,240     $ (3,325 )   $ 251,428  
U.S. Treasury securities and obligations of U.S. government instrumentalities
    48,190       3,148             51,338  
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
    154,754       3,113       (1,919 )     155,948  
Municipal securities
    107,441       1,117       (1,851 )     106,707  
Corporate bonds
    102,547       3,546       (728 )     105,365  
Residential mortgage-backed securities
    16,605       677       (1 )     17,281  
Collateralized mortgage obligations
    229,312       4,237       (2,639 )     230,910  
 
                       
Total fixed maturities
    911,362       18,078       (10,463 )     918,977  
Equity securities:
                               
Common stocks
    4,074       3,435             7,509  
Preferred stocks
    4,000             (1,325 )     2,675  
Perpetual preferred stocks
    2,849             (270 )     2,579  
Mutual funds
    50,608       4,150       (2,832 )     51,926  
 
                       
Total equity securities
    61,531       7,585       (4,427 )     64,689  
 
                       
Total
  $ 972,893     $ 25,663     $ (14,890 )   $ 983,666  
 
                       
                                 
    September 30, 2010  
            Gross     Gross        
    Amortized     unrealized     unrealized     Estimated  
    cost     gains     losses     fair value  
Securities held to maturity:
                               
Obligations of government- sponsored enterprises
  $ 2,303     $ 219     $     $ 2,522  
U.S. Treasury securities and obligations of U.S. government instrumentalities
    1,479       348             1,827  
Corporate bonds
    9,347       532             9,879  
Residential mortgage-backed securities
    897       39             936  
Certificates of deposit
    1,240                   1,240  
 
                       
Total
  $ 15,266     $ 1,138     $     $ 16,404  
 
                       

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
                                 
    December 31, 2009  
            Gross     Gross        
    Amortized     unrealized     unrealized     Estimated  
    cost     gains     losses     fair value  
Securities held to maturity:
                               
Obligations of government- sponsored enterprises
  $ 925     $ 6     $     $ 931  
U.S. Treasury securities and obligations of U.S. government instrumentalities
    3,786       132             3,918  
Corporate bonds
    9,063       534             9,597  
Residential mortgage-backed securities
    1,256       25       (1 )     1,280  
Certificates of deposit
    764                   764  
 
                       
Total
  $ 15,794     $ 697     $ (1 )   $ 16,490  
 
                       
     Gross unrealized losses on investment securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2010 and December 31, 2009 were as follows:
                                                                         
    September 30, 2010  
    Less than 12 months     12 months or longer     Total  
            Gross                     Gross                     Gross        
    Estimated     Unrealized     Number of     Estimated     Unrealized     Number of     Estimated     Unrealized     Number of  
    Fair Value     Loss     Securities     Fair Value     Loss     Securities     Fair Value     Loss     Securities  
Securites available for sale:
                                                                       
Fixed maturities:
                                                                       
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
  $ 8,811     $ (20 )     4     $ 3,709     $ (144 )     3     $ 12,520     $ (164 )     7  
Municipal securities
    776       (62 )     1                         776       (62 )     1  
Residential mortgage-backed securities
    12       (1 )     1       36       (1 )     1       48       (2 )     2  
Collateralized mortgage obligations
    24,159       (249 )     5       1,947       (25 )     1       26,106       (274 )     6  
 
                                                     
Total fixed maturities
    33,758       (332 )     11       5,692       (170 )     5       39,450       (502 )     16  
Equity securities:
                                                                       
Preferred stocks
                      3,474       (526 )     1       3,474       (526 )     1  
Perpetual preferred stocks
                      920       (79 )     1       920       (79 )     1  
Mutual funds
    8,521       (491 )     5       9,825       (653 )     7       18,346       (1,144 )     12  
 
                                                     
Total equity securities
    8,521       (491 )     5       14,219       (1,258 )     9       22,740       (1,749 )     14  
 
                                                     
Total for securities available for sale
  $ 42,279     $ (823 )     16     $ 19,911     $ (1,428 )     14     $ 62,190     $ (2,251 )     30  
 
                                                     

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
                                                                         
    December 31, 2009  
    Less than 12 months     12 months or longer     Total  
            Gross                     Gross                     Gross        
    Estimated     Unrealized     Number of     Estimated     Unrealized     Number of     Estimated     Unrealized     Number of  
    Fair Value     Loss     Securities     Fair Value     Loss     Securities     Fair Value     Loss     Securities  
Securites available for sale:
                                                                       
Fixed maturities:
                                                                       
Obligations of government- sponsored enterprises
  $ 110,602     $ (2,264 )     21     $ 25,468     $ (1,061 )     5     $ 136,070     $ (3,325 )     26  
Obligations of the Commonwealth of Puerto Rico and its instrumentalities
    12,944       (201 )     10       58,866       (1,718 )     22       71,810       (1,919 )     32  
Municipal securities
    62,292       (1,841 )     39       173       (10 )     1       62,465       (1,851 )     40  
Corporate bonds
    10,997       (215 )     4       7,975       (513 )     6       18,972       (728 )     10  
Residential mortgage-backed securities
                      36       (1 )     1       36       (1 )     1  
Collateralized mortgage obligations
    101,265       (1,732 )     21       7,171       (907 )     10       108,436       (2,639 )     31  
 
                                                     
Total fixed maturities
    298,100       (6,253 )     95       99,689       (4,210 )     45       397,789       (10,463 )     140  
Equity securities:
                                                                       
Preferred stocks
                      2,675       (1,325 )     1       2,675       (1,325 )     1  
Perpetual preferred stocks
                      730       (270 )     1       730       (270 )     1  
Mutual funds
    9,994       (907 )     4       21,667       (1,925 )     15       31,661       (2,832 )     19  
 
                                                     
Total equity securities
    9,994       (907 )     4       25,072       (3,520 )     17       35,066       (4,427 )     21  
 
                                                     
Total for securities available for sale
  $ 308,094     $ (7,160 )     99     $ 124,761     $ (7,730 )     62     $ 432,855     $ (14,890 )     161  
 
                                                     
Securities held to maturity:
                                                                       
Residential mortgage-backed securities
  $     $           $ 55     $ (1 )     1     $ 55     $ (1 )     1  
 
                                                     
     The Corporation regularly monitors and evaluates the difference between the cost and estimated fair value of investments. For investments with a fair value below cost, the process includes evaluating: (1) the length of time and the extent to which the estimated fair value has been less than amortized cost for fixed maturity securities, or cost for equity securities, (2) the financial condition, near-term and long-term prospects for the issuer, including relevant industry conditions and trends, and implications of rating agency actions, (3) the Corporation’s intent to sell or the likelihood of a required sale prior to recovery, (4) the recoverability of principal and interest for fixed maturity securities, or cost for equity securities, and (5) other factors, as applicable. This process is not exact and further requires consideration of risks such as credit and interest rate risks. Consequently, if an investment’s cost exceeds its estimated fair value solely due to changes in interest rates, other-than temporary impairment may not be appropriate. Due to the subjective nature of the Corporation’s analysis, along with the judgment that must be applied in the analysis, it is possible that the Corporation could reach a different conclusion whether or not to impair a security if it had access to additional information about the investee. Additionally, it is possible that the investee’s ability to meet future contractual obligations may be different than what the Corporation determined during its analysis, which may lead to a different impairment conclusion in future periods. If after monitoring and analyzing impaired securities, the Corporation determines that a decline in the estimated fair value of any available-for-sale security below cost is other-than-temporary, the carrying amount of equity securities is reduced to its fair value and of fixed maturity securities is reduced by the credit component of the other-than-temporary impairment. When a decline in the estimated fair value of any held-to-maturity security below cost is deemed other-than-temporary, the carrying amount of the security is reduced by the other-than-temporary impairment. The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. In periods subsequent to the recognition of an other-than-temporary impairment, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. For debt securities, the discount (or reduced premium) based on the new cost basis may be accreted into net investment income in future periods based on prospective changes in cash flow estimates, to reflect adjustments to the effective yield.
     The Corporation’s process for identifying and reviewing invested assets for other-than temporary impairments during any quarter includes the following:
  Identification and evaluation of securities that have possible indications of other-than-temporary impairment, which includes an analysis of all investments with gross unrealized investment losses that represent 20% or more of their cost and all investments with an unrealized loss greater than $50.

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
  Review and evaluation of any other security based on the investee’s current financial condition, liquidity, near-term recovery prospects, implications of rating agency actions, the outlook for the business sectors in which the investee operates and other factors. This evaluation is in addition to the evaluation of those securities with a gross unrealized investment loss representing 20% or more of their cost.
 
  Consideration of evidential matter, including an evaluation of factors or triggers that may or may not cause individual investments to qualify as having other-than-temporary impairments; and
 
  Determination of the status of each analyzed security as other-than-temporary or not, with documentation of the rationale for the decision.
     The Corporation continually reviews its investment portfolios under the Corporation’s impairment review policy. Given the current market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and additional material other-than-temporary impairments may be recorded in future periods.
     Obligations of States of the United States and Political Subdivisions of the States, and Obligations of the Commonwealth of Puerto Rico and its Instrumentalities: The unrealized losses on the Corporation’s investments in obligations of states of the U.S. and political subdivisions of the states, and in obligations of the Commonwealth of Puerto Rico and its instrumentalities were mainly caused by fluctuations in interest rates and general market conditions. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. In addition, most of these investments have investment grade ratings. Because the decline in fair value is attributable to changes in interest rates and not credit quality; because the Corporation does not intend to sell the investments; it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity; and because the Corporation expects to collect all contractual cash flows, these investments are not considered other-than-temporarily impaired.
     Residential Mortgage-Backed Securities and Collateralized Mortgage Obligations: The unrealized losses on investments in residential mortgage-backed securities and collateralized mortgage obligations were mostly caused by fluctuations in interest rates and credit spreads. The contractual cash flows of these securities, other than private CMOs, are guaranteed by a U.S. government-sponsored enterprise. The Corporation also has investments in private CMOs. Any loss in these securities is determined according to the seniority level of each tranche, with the least senior (or most junior), typically the unrated residual tranche, taking any initial loss. The investment grade credit rating of our securities reflects the seniority of the securities that the Corporation owns. Because the decline in fair value is attributable to changes in interest rates and not credit quality, the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, and because the Corporation expects to collect all contractual cash flows, these investments are not considered other-than-temporarily impaired.
     Preferred Stocks: This particular instrument has a specified maturity, the issuer’s capital ratios are above regulatory levels, the issuer has continued dividend payments on this instrument and interest payments on all of its outstanding debt instruments, the issuer does not have the ability to call the security at a price lower than its stated value, the Corporation expects to collect all contractual cash flows, the estimated fair value of this security has improved significantly during the nine months ended September 30, 2010, the Corporation does not have the intent to sell the investment, and it is not more likely than not that the Corporation will be required to sell the investment before market price recovery or maturity, this investment is not considered other-than-temporarily impaired.
     Perpetual Preferred Stocks: This security has experienced a significant improvement in value during the nine months ended September 30, 2010. The issuer’s capital ratios are above regulatory levels, analysts’ target price is above market price and book value as of June 30, 2010, the Corporation does not have the intent to sell the investment, and the Corporation has the intent and ability to hold the investments until a market price recovery, this investment is not considered other-than-temporarily impaired.

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Table of Contents

Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
     Mutual Funds: The unrealized losses in the Corporation’s investment in mutual funds are in several mutual funds that in turn invested in fixed income securities and in broad market indices securities. We evaluated for other-than-temporary impairment these securities as follows:
  Mutual funds invested in fixed income securities: The unrealized loss of each position in this category represents 10% or less of its book value. The Corporation evaluated the invested assets that compose the funds, which are mostly fixed income obligations of the Puerto Rico and U.S. government or its agencies. In Puerto Rico these mutual funds are exempt and have a higher dividend yield than investments in other Puerto Rico securities. As these mutual funds are invested in fixed income securities, they are susceptible to fluctuations in interest rates as well as supply and demand. Earlier in the year the mutual funds showed a relative underperformance when compared to the underlying assets because of a decrease in supply and demand, which caused the market price to be closer to the net asset value compared to where this relationship had been historically. Lately, the demand for these mutual funds has increased because of the high yield the funds offer. Because the current valuations are close to the funds’ underlying assets, the funds’ underlying assets are mostly on investment grade fixed income securities (mostly U.S. and Puerto Rico government and its agencies, which have been affected by general market conditions), and the Corporation has the intent and ability to hold the investments until a market price recovery, these investments are not considered other-than-temporarily impaired.
 
  Broad market indices securities: The unrealized loss of each position in this category is less than 3% of its book value and is the result of fluctuations in equity markets. These positions are designed to mirror the behavior of the Standard &Poor’s 500 and the Russell 1000 Value indices and have been with an unrealized loss for a period less than six months. Because there has been an improvement in the market price of these positions in the period subsequent to September 30, 2010, these positions have been with an unrealized loss for a short time period, and the Corporation has the intent and ability to hold the investments until a market price recovery, these investments are not considered other-than-temporarily impaired.
     Maturities of investment securities classified as available for sale and held to maturity at September 30, 2010 were as follows:
                 
    Amortized     Estimated  
    cost     fair value  
Securities available for sale:
               
Due in one year or less
  $ 10,749     $ 10,892  
Due after one year through five years
    113,498       118,928  
Due after five years through ten years
    229,039       247,098  
Due after ten years
    346,720       376,462  
Residential mortgage-backed securities
    13,912       14,753  
Collateralized mortgage obligations
    248,036       255,336  
 
           
 
  $ 961,954     $ 1,023,469  
 
           
Securities held to maturity:
               
Due in one year or less
  $ 1,240     $ 1,240  
Due after one year through five years
    9,347       9,879  
Due after five years through ten years
    510       513  
Due after ten years
    3,272       3,836  
Residential mortgage-backed securities
    897       936  
 
           
 
  $ 15,266     $ 16,404  
 
           
     Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties.

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
     Information regarding realized and unrealized gains and losses from investments for the three months and nine months ended September 30, 2010 and 2009 is as follows:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Realized gains (losses):
                               
Fixed maturity securities:
                               
Securities available for sale:
                               
Gross gains from sales
  $     $ 65     $ 69     $ 3,122  
Gross losses from sales
    (148 )           (272 )     (3 )
Gross losses from other-than-temporary impairments
          (240 )     (95 )     (1,393 )
 
                       
Total debt securities
    (148 )     (175 )     (298 )     1,726  
 
                       
Equity securities:
                               
Trading securities:
                               
Gross gains from sales
    110       107       935       416  
Gross losses from sales
    (212 )     (104 )     (741 )     (823 )
 
                       
 
    (102 )     3       194       (407 )
 
                       
Securities available for sale:
                               
Gross gains from sales
    273       2,322       3,259       2,322  
Gross losses from sales
    (19 )           (576 )     (283 )
Gross losses from other-than-temporary impairments
    (317 )           (2,838 )     (4,560 )
 
                       
 
    (63 )     2,322       (155 )     (2,521 )
 
                       
Total equity securities
    (165 )     2,325       39       (2,928 )
 
                       
Net realized (losses) gains on securities
  $ (313 )   $ 2,150     $ (259 )   $ (1,202 )
 
                       
     The other-than-temporary impairments on fixed maturity securities are attributable to credit losses.
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Changes in net unrealized gains (losses):
                               
Recognized in income:
                               
Equity securities – trading
  $ 4,611     $ 4,860     $ 631     $ 8,036  
 
                       
Recognized in accumulated other comprehensive income:
                               
Fixed maturities – available for sale
    14,376       21,393       53,900       21,044  
Equity securities – available for sale
    5,011       3,346       3,066       2,837  
 
                       
 
  $ 19,387     $ 24,739     $ 56,966     $ 23,881  
 
                       
Not recognized in the consolidated financial statements:
                               
Fixed maturities – held to maturity
  $ 93     $ 90     $ 442     $ (441 )
 
                       
     The deferred tax liability/asset on unrealized gains and losses, respectively, recognized in accumulated other comprehensive income/ (loss) during the nine months ended September 30, 2010 and 2009 aggregated to $10,315 and $3,582, respectively.
     As of September 30, 2010 and December 31, 2009, no individual investment in securities exceeded 10% of stockholders’ equity.

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
     Components of net investment income were as follows:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Fixed maturities
  $ 11,707     $ 11,629     $ 34,303     $ 34,498  
Equity securities
    756       891       2,595       2,984  
Policy loans
    113       105       330       302  
Cash equivalents and interest-bearing deposits
    58       127       160       485  
Other
    160       203       500       587  
 
                       
Total
  $ 12,794     $ 12,955     $ 37,888     $ 38,856  
 
                       
(5) Premiums and Other Receivables, Net
     Premiums and other receivables, net as of September 30, 2010 and December 31, 2009 were as follows:
                 
    September 30,     December 31,  
    2010     2009  
Premium
  $ 142,397     $ 98,429  
Self-funded group receivables
    81,634       70,315  
FEHBP
    11,198       10,297  
Agents balances
    28,187       37,888  
Accrued interest
    10,278       9,287  
Reinsurance recoverable
    47,303       43,951  
Other
    26,050       27,999  
 
           
 
    347,047       298,166  
 
           
Less allowance for doubtful receivables:
               
Premiums
    24,884       20,280  
Other
    7,071       4,954  
 
           
 
    31,955       25,234  
 
           
Total premiums and other receivables
  $ 315,092     $ 272,932  
 
           

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
(6) Claim Liabilities
     The activity in the total claim liabilities for the three months and nine months ended September 30, 2010 and 2009 is as follows:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Claim liabilities at beginning of period
  $ 411,410     $ 363,914     $ 360,446     $ 323,710  
Reinsurance recoverable on claim liabilities
    (33,069 )     (30,154 )     (30,712 )     (30,432 )
 
                       
Net claim liabilities at beginning of period
    378,341       333,760       329,734       293,278  
 
                       
Incurred claims and loss-adjustment expenses:
                               
Current period insured events
    417,642       407,651       1,259,518       1,194,365  
Prior period insured events
    671       1,731       4,006       (2,872 )
 
                       
Total
    418,313       409,382       1,263,524       1,191,493  
 
                       
Payments of losses and loss-adjustment expenses:
                               
Current period insured events
    383,961       353,243       951,570       903,574  
Prior period insured events
    22,016       44,728       251,011       236,026  
 
                       
Total
    405,977       397,971       1,202,581       1,139,600  
 
                       
Net claim liabilities at end of period
    390,677       345,171       390,677       345,171  
Reinsurance recoverable on claim liabilities
    33,142       32,626       33,142       32,626  
 
                       
Claim liabilities at end of period
  $ 423,819     $ 377,797     $ 423,819     $ 377,797  
 
                       
     As a result of differences between actual amounts and estimates of insured events in prior periods, the amounts included as incurred claims for prior period insured events differ from anticipated claims incurred.
     The amount of incurred claims and loss-adjustment expenses for prior period insured events for the three months and nine months ended September 30, 2010 and for the three months ended September 30, 2009 is due primarily to higher than expected utilization trends. The credit in the incurred claims and loss-adjustment expenses for prior period insured events for the nine months ended September 30, 2009 is due primarily to better than expected utilization trends.
     Reinsurance recoverable on unpaid claims is reported as premium and other receivables, net in the accompanying consolidated financial statements. The claims incurred disclosed in this table exclude the change in the liability for future policy benefits expense, which amounted to $3,201 and $8,656, during the three months and nine months ended September 30, 2010, respectively. The change in the liability for future policy benefits during the three months and nine months ended September 30, 2009 amount to $3,010 and $9,655, respectively.
(7) Borrowings
     During September 2010, the Company entered into an agreement to purchase $25.0 million of its $60.0 million, 6.60% unsecured note payable with a settlement date of October 1, 2010.

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
(8) Fair Value Measurements
     Assets recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs, as defined by current accounting guidance for fair value measurements and disclosures, are as follows:
     
Level Input:   Input Definition:
Level 1
  Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
 
   
Level 2
  Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.
 
   
Level 3
  Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
     The fair value information of financial instruments in the accompanying consolidated financial statements was determined as follows:
(i) Cash and Cash Equivalents
     The carrying amount approximates fair value because of the short-term nature of such instruments.
(ii) Investment in Securities
     The fair value of investment securities is estimated based on quoted market prices for those or similar investments. Additional information pertinent to the estimated fair value of investment in securities is included in note 4.
(iii) Policy Loans
     Policy loans have no stated maturity dates and are part of the related insurance contract. The carrying amount of policy loans approximates fair value because their interest rate is reset periodically in accordance with current market rates.
(iv) Receivables, Accounts Payable and Accrued Liabilities
     The carrying amount of receivables, accounts payable and accrued liabilities approximates fair value because they mature and should be collected or paid within 12 months after September 30, 2010.
(v) Policyholder Deposits
     The fair value of policyholder deposits is the amount payable on demand at the reporting date, and accordingly, the carrying value amount approximates fair value.
(vi) Borrowings
     The carrying amounts and fair value of the Corporation’s borrowings are as follows:
                                 
    September 30, 2010     December 31, 2009  
    Carrying     Fair     Carrying     Fair  
    amount     value     amount     value  
Loans payable to bank
  $ 21,437     $ 21,437     $ 22,667     $ 22,667  
6.3% senior unsecured notes payable
    50,000       49,725       50,000       48,000  
6.6% senior unsecured notes payable
    59,687       59,025       60,000       57,420  
6.7% senior unsecured notes payable
    35,000       34,458       35,000       33,320  
 
                       
Totals
  $ 166,124     $ 164,645     $ 167,667     $ 161,407  
 
                       

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
          The carrying amount of the loans payable to bank approximates fair value due to its floating interest-rate structure. The fair value of the senior unsecured notes payable was determined using broker quotations. The carrying amount of short-term borrowings approximates fair value because of the short-term nature of such instruments.
(vii) Derivative Instruments
     Current market pricing models were used to estimate fair value of structured notes agreements. Fair values were determined using market quotations provided by outside securities consultants or prices provided by market makers using observable inputs.
     The following table summarizes fair value measurements by level at September 30, 2010 and December 31, 2009 for assets measured at fair value on a recurring basis:
                                 
    September 30, 2010  
    Level 1     Level 2     Level 3     Total  
Equity securities held for trading
  $ 46,228     $     $     $ 46,228  
Securities available for sale:
                               
Fixed maturity securities
                               
Obligations of government-sponsored
          201,728             201,728  
U.S. Treasury securities and obligations of U.S government instrumentalities
    55,966                   55,966  
Obligations of the Commonwealth of Puerto and its instrumentalities
          165,291             165,291  
Municipal securities
          213,769             213,769  
Corporate bonds
          116,626             116,626  
Residential agency mortgage-backed securities
          14,753             14,753  
Collateralized mortgage obligations
          255,336             255,336  
 
                       
Total fixed maturities
    55,966       967,503             1,023,469  
 
                       
Equity securities
                               
Common stocks
    3,686                   3,686  
Preferred stocks
    3,845                   3,845  
Perpetual preferred stocks
    921                   921  
Mutual funds
    24,211       39,732       846       64,789  
 
                       
Total equity securities
    32,663       39,732       846       73,241  
 
                       
Derivatives (reported within other assets in the consolidated balance sheets)
          659             659  
 
                       
Total
  $ 134,857     $ 1,007,894     $ 846     $ 1,143,597  
 
                       

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
                                 
    December 31, 2009  
    Level 1     Level 2     Level 3     Total  
Equity securities held for trading
  $ 43,909     $     $     $ 43,909  
Securities available for sale:
                               
Fixed maturity securities
                               
Obligations of government-sponsored
          251,428             251,428  
U.S. Treasury securities and obligations of U.S government instrumentalities
    51,338                   51,338  
Obligations of the Commonwealth of Puerto and its instrumentalities
          155,948             155,948  
Municipal securities
          106,707             106,707  
Corporate bonds
          105,365             105,365  
Residential agency mortgage-backed securities
          17,281             17,281  
Collateralized mortgage obligations
          230,910             230,910  
 
                       
Total fixed maturities
    51,338       867,639             918,977  
 
                       
Equity securities
                               
Common stocks
    7,509                   7,509  
Preferred stocks
    2,675                   2,675  
Perpetual preferred stocks
    2,579                   2,579  
Mutual funds
    6,961       44,190       775       51,926  
 
                       
Total equity securities
    19,724       44,190       775       64,689  
 
                       
Derivatives (reported within other assets in the consolidated balance sheets)
          1,608             1,608  
 
                       
Total
  $ 114,971     $ 913,437     $ 775     $ 1,029,183  
 
                       
     The fair value of fixed maturity and equity securities included in the Level 2 category were based on market values obtained from independent pricing services, which utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information and for structured securities, cash flow and when available loan performance data. Because many fixed income securities do not trade on a daily basis, the pricing company’s evaluated pricing applications apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations. For certain equity securities, quoted market prices for the identical security are not always available and the fair value is estimated by reference to similar securities for which quoted prices are available. The independent pricing services monitor market indicators, industry and economic events, and for broker-quoted only securities, obtain quotes from market makers or broker-dealers that they recognize to be market participants.

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
     A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months and nine months ended September 30, 2010 and 2009 is as follows:
                                                 
    Three months ended  
    September 30, 2010     September 30, 2009    
    Fixed                     Fixed              
    Maturity     Equity             Maturity     Equity        
    Securities     Securities     Total     Securities     Securities     Total  
Beginning balance
  $     $ 699     $ 699     $ 560     $ 1,747     $ 2,307  
Total gains or losses:
                                               
Realized in earnings
                      (240 )           (240 )
Unrealized in other accumulated comprehensive income
          (6 )     (6 )                  
Purchases and sales
          153       153                    
Transfers in and/or out of Level 3
                                   
 
                                   
Ending balance
  $     $ 846     $ 846     $ 320     $ 1,747     $ 2,067  
 
                                   
                                                 
    Nine months ended  
    September 30, 2010     September 30, 2009    
    Fixed                     Fixed              
    Maturity     Equity             Maturity     Equity        
    Securities     Securities     Total     Securities     Securities     Total  
Beginning balance
  $     $ 775     $ 775     $ 1,281     $ 1,086     $ 2,367  
Total gains or losses:
                                               
Realized in earnings
                      (1,264 )           (1,264 )
Unrealized in other accumulated comprehensive income
          (253 )     (253 )     303       661       964  
Purchases and sales
          324       324                    
Transfers in and/or out of Level 3
                                   
 
                                   
Ending balance
  $     $ 846     $ 846     $ 320     $ 1,747     $ 2,067  
 
                                   
     There were no transfers in or transfers out of Level 3 for the nine months ended September 30, 2010 and 2009.
     As of September 30, 2010, a mutual fund investment was classified as Level 3 due to the unavailability of market quotes for the underlying securities.
     During the three months and nine months ended September 30, 2009, certain fixed maturity and equity securities classified at Level 3 were thinly traded due to issuer liquidity concerns. Consequently, broker quotes or other observable inputs were not always available and the fair value of these securities was estimated using internal estimates for inputs including, but not limited to, credit spreads, default rates and benchmark yields. An other-than- temporary impairment of approximately $0.2 million and $1.3 million was recorded on Level 3 securities during the three months and nine months ended September 30, 2009.
(9) Share-Based Compensation
     Share-based compensation expense recorded during the three months and nine months ended September 30, 2010 was $638 and $1,316, respectively. Share-based compensation expense recorded during the three months and nine months ended September 30, 2009 was $779 and $3,258, respectively. Share based compensation expense for the nine months ended September 30, 2009 includes $937 of compensation cost that should have been recorded in

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
earlier periods. This adjustment relates to employees that qualified for approved retirement as defined under the plan.
     Pursuant to the 2007 Incentive Plan, on September 30, 2010 the Corporation granted certain key employees 4,032 stock options, 741 shares of restricted stocks, and 741 performance awards. Effective July 12, 2010, the Corporation granted 15,480 shares of restricted stock to non-employee directors pursuant to the 2007 Incentive Plan.
(10) Comprehensive Income (Loss)
     The accumulated balances for each classification of other comprehensive income (loss), net of tax, are as follows:
                         
                    Accumulated  
    Net unrealized     Liability for     other  
    gain on     pension     comprehensive  
    securities     benefits     income (loss)  
Balance at January 1
  $ 9,141     $ (20,717 )   $ (11,576 )
Net current period change
    48,332       886       49,218  
 
                 
Balance at September 30
  $ 57,473     $ (19,831 )   $ 37,642  
 
                 
(11) Income Taxes
     Under Puerto Rico income tax law, the Corporation is not allowed to file consolidated tax returns with its subsidiaries. The Corporation and its subsidiaries are subject to Puerto Rico income taxes. The Corporation’s insurance subsidiaries are also subject to U.S. federal income taxes for foreign source dividend income. As of September 30, 2010, tax years 2004 through 2009 for the Corporation and its subsidiaries are subject to examination by Puerto Rico taxing authorities.
     Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of earnings in the period that includes the enactment date. Quarterly income taxes are calculated using the effective tax rate determined based on the income forecasted for the full fiscal year.
     On July 10, 2009 the Governor of Puerto Rico signed into law Puerto Rico’s Act No. 37, which requires certain corporations to pay a 5% additional special tax over tax liability. The effective tax rate includes the additional special tax, as enacted.

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
(12) Pension Plan
     The components of net periodic benefit cost for the three months and nine months ended September 30, 2010 and 2009 were as follows:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Components of net periodic benefit cost:
                               
Service cost
  $ 1,218     $ 1,372     $ 3,772     $ 3,791  
Interest cost
    1,478       1,614       4,497       4,290  
Expected return on assets
    (1,044 )     (1,135 )     (3,148 )     (3,047 )
Amortization of prior service benefit
    (110 )     (127 )     (333 )     (340 )
Amortization of actuarial loss
    588       718       1,782       1,809  
 
                       
Net periodic benefit cost
  $ 2,130     $ 2,442     $ 6,570     $ 6,503  
 
                       
     Employer contributions: The Corporation disclosed in its audited consolidated financial statements for the year ended December 31, 2009 that it expected to contribute $7,000 to its pension program in 2010. As of September 30, 2010, the Corporation has contributed $9,800 to the pension program. The Corporation does not expect to make further contributions to the program during 2010.
(13) Net Income Available to Stockholders and Net Income per Share
     The following table sets forth the computation of basic and diluted earnings per share for the three months and nine months ended September 30, 2010 and 2009:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Numerator for earnings per share:
                               
Net income available to stockholders
  $ 20,488     $ 18,084     $ 46,737     $ 40,676  
 
                       
Denominator for basic earnings per share:
                               
Weighted average of common shares
    29,095,272       29,265,472       29,085,188       29,607,691  
Effect of dilutive securities
    220,301       107,462       197,690       64,876  
 
                       
Denominator for diluted earnings per share
    29,315,573       29,372,934       29,282,878       29,672,567  
 
                       
Basic net income per share
  $ 0.70     $ 0.62     $ 1.61     $ 1.37  
Diluted net income per share
  $ 0.70     $ 0.62     $ 1.60     $ 1.37  
     During the nine months ended September 30, 2009, the weighted average of stock option shares of approximately 1,013,000 was excluded from the denominator for the diluted earnings per share computation because the stock options were anti-dilutive. There were no anti-dilutive stock options during the three months and nine months ended September 30, 2010 and during the three months ended September 30, 2009.
(14) Contingencies
     As of September 30, 2010, the Corporation is a defendant in various lawsuits arising in the ordinary course of business. We are also defendants in various other claims and proceedings, some of which are described below. Furthermore, the Commissioner of Insurance, as well as other Federal and Puerto Rico government authorities,

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
regularly make inquiries and conduct audits concerning the Corporation’s compliance with applicable insurance and other laws and regulations.
     Management believes that the aggregate liabilities, if any, arising from all such claims, assessments, audits and lawsuits will not have a material adverse effect on the consolidated financial position or results of operations of the Corporation. However, given the inherent unpredictability of these matters, it is possible that an adverse outcome in certain matters could have a material adverse effect on the financial condition, operating results and/or cash flows. Where the Corporation believes that a loss is both probable and estimable, such amounts have been recorded. In other cases, it is at least reasonably possible that the Corporation may incur a loss related to one or more of the mentioned pending lawsuits or investigations, but the Corporation is unable to estimate the range of possible loss which may be ultimately realized, either individually or in the aggregate, upon their resolution.
     Additionally, we may face various potential litigation claims that have not been asserted to date, including claims from persons purporting to have contractual rights to acquire shares of the Corporation on favorable terms or to have inherited such shares notwithstanding applicable transfer and ownership restrictions.
Hau et al Litigation (formerly known as Jordan et al)
     On April 24, 2002, Octavio Jordán, Agripino Lugo, Ramón Vidal, and others filed a suit against the Corporation, the Corporation’s subsidiary TSS and others in the Court of First Instance for San Juan, Superior Section (the “Court of First Instance”), alleging, among other things, violations by the defendants of provisions of the Puerto Rico Insurance Code, antitrust violations, unfair business practices, RICO violations, breach of contract with providers, and damages in the amount of $12 million. Following years of complaint amendments, motions practice and interim appeals up to the level of the Puerto Rico Supreme Court, the plaintiffs amended their complaint on June 20, 2008 to allege with particularity the same claims initially asserted but on behalf of a more limited group of plaintiffs, and increase their claim for damages to approximately $207 million. Discovery is ongoing. The Corporation intends to vigorously defend this claim.
Dentists Association Litigation
     On February 11, 2009, the Puerto Rico Dentists Association (Colegio de Cirujanos Dentistas de Puerto Rico) filed a complaint in the Court of First Instance against 24 health plans operating in Puerto Rico that offer dental health coverage. The Corporation and two of its subsidiaries, TSS and Triple-C, Inc. (“TCI”), were included as defendants. This litigation purports to be a class action filed on behalf of Puerto Rico dentists who are similarly situated; however, the complaint does not include a single dentist as a class representative nor a definition of the intended class.
     The complaint alleges that the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish the payments due to dentists so that they are not paid in a timely and complete manner for the covered medically necessary services they render. The complaint also alleges, among other things, violations to the Puerto Rico Insurance Code, antitrust laws, the Puerto Rico racketeering statute, unfair business practices, breach of contract with providers, and damages in the amount of $150 million. In addition, the complaint claims that the Puerto Rico Insurance Companies Association is the hub of an alleged conspiracy concocted by the member plans to defraud dentists. There are numerous available defenses to oppose both the request for class certification and the merits. The Corporation intends to vigorously defend this claim.
     Two codefendant plans removed the case to federal court, which the plaintiffs and the other codefendants, including the Corporation, opposed. The federal District Court decided that it lacked jurisdiction under the Class Action Fairness Act (“CAFA”) and remanded the case to state court. The removing defendants petitioned to appeal to the First Circuit Court of Appeals. Having accepted the appeal, the First Circuit Court of Appeals issued an order in late October 2009 which found the lower court’s decision premature. The Court of Appeals remanded the case to the federal District Court and allowed limited discovery to determine whether the case should be heard in federal court pursuant to CAFA. The parties completed the limited discovery in August 2010 and supplemented their previous filings.

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
Colón Litigation
     On October 15, 2007, José L. Colón-Dueño, a former holder of one share of TSS predecessor stock, filed suit against TSS and the Puerto Rico Commissioner of Insurance (the “Commissioner”) in the Court of First Instance. The sale of that share to Mr. Colón-Dueño was voided in 1999 pursuant to an order issued by the Commissioner in which the sale of 1,582 shares to a number of TSS shareholders was voided. TSS, however, appealed the Commissioner’s order before the Puerto Rico Court of Appeals, which upheld the order on March 31, 2000. Plaintiff requests that the court direct TSS to return his share of stock and compensate him for alleged damages in excess of $500,000 plus attorney’s fees. The Corporation is vigorously contesting this lawsuit because, among other reasons, the Commissioner’s order is final and cannot be collaterally attacked in this litigation.
Puerto Rico Center for Municipal Revenue Collection
     On March 1, 2006 and March 3, 2006, respectively, the Puerto Rico Center for Municipal Revenue Collection (CRIM) imposed a real property tax assessment of approximately $1.3 million and a personal property tax assessment of approximately $4.0 million upon TSS for fiscal years 1992-1993 through 2002-2003. During that time, TSS qualified as a tax-exempt entity under Puerto Rico law pursuant to rulings issued by the Puerto Rico tax authorities. In imposing the tax assessments, CRIM revoked the tax rulings retroactively, based on its contention that a for-profit corporation such as TSS is not entitled to such an exemption. TSS unsuccessfully filed suit in the local court system —up to the level of the Puerto Rico Supreme Court— and a petition for a writ of certiorari before the U.S. Supreme Court, based on its strong belief that CRIM’s retroactive revocation of applicable tax rulings and its imposition of a tax liability reaching back over ten years constituted a violation of the Corporation’s due process rights.
     TSS has decided to benefit from an incentive plan established under Law No. 71 of July 2, 2010, which waives accumulated interest, penalties and surcharges. As a result TSS will pay a total of approximately $5.3 million in property taxes for the period involved in this litigation. The amount accrued is included within accounts payable and accrued liabilities in the accompanying consolidated financial statements.
Claims by Heirs of Former Shareholders
     The Corporation and TSS are defending five individual lawsuits, all filed in state court, from persons who claim to have inherited a total of 80 shares of the Corporation or one of its predecessors or affiliates (before giving effect to the 3,000-for-one stock split). While each case presents unique facts, the lawsuits generally allege that the redemption of the shares by the Corporation pursuant to transfer and ownership restrictions contained in the Corporation’s (or its predecessors’ or affiliates’) articles of incorporation and bylaws was improper. One of the cases is in its initial stage; in the other cases, discovery has been completed and the parties are awaiting trial. Management believes all these claims are time barred under one or more statutes of limitations and other grounds and is vigorously defending them.
ACODESE Investigation
     During April 2010, each of the Company’s wholly-owned insurance subsidiaries received subpoenas for documents from the U.S. Attorney for the Commonwealth of Puerto Rico (the “U.S. Attorney”) and the Puerto Rico Department of Justice (“PRDOJ”) requesting information principally related to the Asociación de Compañías de Seguros de Puerto Rico, Inc. (“ACODESE” by its Spanish acronym). Also in April, the Company’s insurance subsidiaries received a request for information from the Office of the Commissioner of Insurance of Puerto Rico (“OCI”) related principally to ACODESE. The Company’s insurance subsidiaries are members of ACODESE, an insurance trade association established in Puerto Rico since 1975, and their current presidents have participated over the years on ACODESE’s board of directors.
     The Company believes similar subpoenas and information requests were issued to other member companies of ACODESE in connection with the investigation of alleged payments by the former Executive Vice President of

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Triple-S Management Corporation
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)

(Unaudited)
ACODESE to members of the Puerto Rico Legislative Assembly beginning in 2005. The Company, however, has not been informed of the specific subject matter of the investigations being conducted by the U.S. Attorney, the PRDOJ or the OCI. The Company is fully complying with the subpoenas and the request for information and intends to cooperate with any related government investigation. The Company at this time cannot reasonably assess the outcome of these investigations or their impact on the Company.
Intrusions into Triple-C, Inc. Internet IPA Database
     On September 21, 2010, we learned from a competitor that a specific internet database managed by our subsidiary TCI, containing information pertaining to individuals previously insured by TSS under the Government of Puerto Rico’s Health Insurance Plan (“HIP”) and to independent practice associations (“IPAs”) that provided services to those individuals, had been accessed without authorization by certain of our competitor’s employees from September 9 to September 15, 2010. We immediately began an investigation and engaged external resources to assist in this matter. TCI served as a third-party administrator for TSS in the administration of its HIP contracts until September 30, 2010. We have identified the information that was accessed and downloaded into the competitor’s system. The September 2010 intrusions may have potentially compromised protected health information of approximately 398,000 beneficiaries in the North and Metro-North regions of the HIP. We have also learned as a result of our ongoing investigation that protected health information of approximately 5,500 HIP beneficiaries, 2,500 Medicare beneficiaries and IPA data from all three HIP regions previously serviced by TSS was accessed through multiple, separate intrusions into the TCI IPA database from October 2008 to August 2010. The stolen information did not include Social Security numbers.
     Our investigation has revealed that the security breaches were the result of unauthorized use of one or more active user IDs and passwords specific to the TCI IPA database, and not the result of breaches of TSS’s or the Corporation’s system security features. We cannot at this time determine the purpose of these breaches and do not know the extent of any fraudulent use of the information or its impact on the potentially affected individuals and IPAs. We believe, however, that the most likely target was financial information related to IPAs rather than the individuals’ information. During the course of our investigation we learned that there may have been improper uses of the IPA passwords by one or more consultants working for the IPAs. We have taken measures to strengthen the TCI server security and credentials management procedures, and are conducting an assessment of our system-wide data and facility security to prevent the occurrence of a similar incident in the future. We continue to investigate these events and to analyze the data as it becomes known to us to identify all individuals and entities whose information may have been impacted, and to take any additional corresponding remedial actions in accordance with applicable laws and regulations.
     We have notified the appropriate Puerto Rico and federal government agencies of these events, and have issued public notice of the breaches as required under Puerto Rico law. We have received a number of inquiries and requests for information related to these events from these government agencies and are cooperating with them. As a result of our ongoing investigation, we have determined that additional filings and public notices will be required. In addition, the Puerto Rico government agency that oversees the HIP has levied a fine of $100,000 on TSS in connection with these incidents, which we are appealing. Other government agencies may seek to impose fines or other obligations on us. We do not have sufficient information at this time to predict whether any future action by government entities or others as a result of the data breaches would adversely affect our business, financial condition and results of operations.
(15) Subsequent Event
     The Corporation evaluated subsequent events through the date that these consolidated interim financial statements were issued. No events have occurred that required disclosure or adjustments.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     The Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q is intended to update the reader on matters affecting the financial condition and results of operations for the three months and nine months ended September 30, 2010. Therefore, the following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K filed with the United States Securities and Exchange Commission as of and for the year ended December 31, 2009.
Cautionary Statement Regarding Forward-Looking Information
     This Quarterly Report on Form 10-Q and other of our publicly available documents may include statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, among other things: statements concerning our business and our financial condition and results of operations. These statements are not historical, but instead represent our belief regarding future events, any of which, by their nature, are inherently uncertain and outside of our control. These statements may address, among other things, future financial results, strategy for growth, and market position. It is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. The factors that could cause actual results to differ from those in the forward-looking statements are discussed throughout this form. We are not under any obligation to update or alter any forward-looking statement (and expressly disclaims any such obligations), whether as a result of new information, future events or otherwise. Factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, but are not limited to, rising healthcare costs, business conditions and competition in the different insurance segments, government action and other regulatory issues.
Overview
     We are one of the most significant players in the managed care industry in Puerto Rico and have over 50 years of experience in this industry. We offer a broad portfolio of managed care and related products in the Commercial and Medicare (including Medicare Advantage and the Part D stand-alone prescription drug plan (“PDP”)) markets. In the Commercial market we are the largest provider of managed care products. We offer products to corporate accounts, U.S. federal government employees, local government employees, individual accounts and Medicare Supplement. We also participated in the Government of Puerto Rico Health Reform (“Medicaid”) up to September 30, 2010. Medicaid is a government of Puerto Rico-funded managed care program for the medically indigent that is similar to the Medicaid program in the U.S.
     We have the exclusive right to use the Blue Cross Blue Shield name and mark throughout Puerto Rico and U.S. Virgin Islands. As of September 30, 2010 we serve approximately 1.3 million members across all regions of Puerto Rico and U.S. Virgin Islands. Excluding the Medicaid membership, which we served until September 30, 2010, we serve over 800 thousand members covering approximately 20% of the Puerto Rico population. For the nine months ended September 30, 2010, our managed care segment represented approximately 90% of our total consolidated premiums earned. We also have significant positions in the life insurance and property and casualty insurance markets. Our life insurance segment had a market share of approximately 12.5% (in terms of direct premiums) during the year ended December 31, 2009. Our property and casualty segment had a market share of approximately 9% (in terms of direct premiums) during the year ended December 31, 2009.
     We participate in the managed care market through our subsidiary, Triple-S Salud, Inc. (“TSS”). Our managed care subsidiary is a Blue Cross Blue Shield Association (“BCBSA”) licensee, which provides us with exclusive use of the Blue Cross Blue Shield name and mark throughout Puerto Rico and U.S. Virgin Islands.
     We participate in the life insurance market through our subsidiary, Triple-S Vida, Inc. (“TSV”) and in the property and casualty insurance market through our subsidiary, Triple-S Propiedad, Inc. (“TSP”), each one representing approximately 5% of our consolidated premiums earned, net for the nine months ended September 30, 2010.
     Intersegment revenues and expenses are reported on a gross basis in each of the operating segments but eliminated in the consolidated results. Except as otherwise indicated, the numbers for each segment presented in

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this Quarterly Report on Form 10-Q do not reflect intersegment eliminations. These intersegment revenues and expenses affect the amounts reported on the financial statement line items for each segment, but are eliminated in consolidation and do not change net income. The following table shows premiums earned, net and net fee revenue and operating income for each segment, as well as the intersegment premiums earned, service revenues and other intersegment transactions, which are eliminated in the consolidated results:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
(Dollar amounts in millions)   2010     2009     2010     2009  
Premiums earned, net:
                               
Managed care
  $ 446.4     $ 428.2     $ 1,342.7     $ 1,246.6  
Life insurance
    26.7       24.7       78.7       74.5  
Property and casualty insurance
    24.5       24.4       75.2       73.0  
Intersegment premiums earned
    (1.1 )     (1.0 )     (3.2 )     (3.4 )
 
                       
Consolidated premiums earned, net
  $ 496.5     $ 476.3     $ 1,493.4     $ 1,390.7  
 
                       
 
                               
Administrative service fees:
                               
Managed care
  $ 10.9     $ 10.5     $ 37.1     $ 32.0  
Intersegment administrative service fees
    (0.7 )     (0.7 )     (2.2 )     (2.0 )
 
                       
Consolidated administrative service fees
  $ 10.2     $ 9.8     $ 34.9     $ 30.0  
 
                       
 
                               
Operating income:
                               
Managed care
  $ 16.4     $ 10.1     $ 47.5     $ 32.1  
Life insurance
    4.6       4.0       13.1       10.9  
Property and casualty insurance
    2.2       0.2       3.3       4.4  
Intersegment and other
    0.7       1.1       2.4       3.0  
 
                       
Consolidated operating income
  $ 23.9     $ 15.4     $ 66.3     $ 50.4  
 
                       
     Our revenues primarily consist of premiums earned, net and administrative service fees. These revenues are derived from the sale of managed care products in the Commercial market to employer groups, individuals and government-sponsored programs, principally Medicare and Medicaid. Premiums are derived from insurance contracts and administrative service fees are derived from self-funded contracts, under which we provide a range of services, including claims administration, billing and membership services, among others. Revenues also include premiums earned from the sale of property and casualty and life insurance contracts, and investment income. Substantially all of our earnings are generated in Puerto Rico.
     Claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and other service providers, and to policyholders. Each segment’s results of operations depend in significant part on their ability to accurately predict and effectively manage claims. A portion of the claims incurred for each period consists of claims reported but not paid during the period, as well as a management and actuarial estimate of claims incurred but not reported during the period. Operating expenses consist primarily of compensation expenses, commission payments to brokers and other overhead business expenses.
     We use operating income as a measure of performance of the underwriting and investment functions of our segments. We also use the loss ratio and the operating expense ratio as measures of performance. The loss ratio is claims incurred divided by premiums earned, net, multiplied by 100. The operating expense ratio is operating expenses divided by premiums earned; net and administrative service fees, multiplied by 100.
Recent Developments
Federal Health Reform Legislation
     On March 23, 2010, President Obama signed into law federal health reform legislation, known as the Patient Protection and Affordable Care Act. As further detailed below, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, which was signed into law on March 30, 2010 (collectively, Pub. L. No. 111-148, and referred to herein as “PPACA”), includes certain mandates that will take effect in 2010, as well as other requirements that will take effect over the next eight (8) years. Many aspects of the PPACA will be further articulated and clarified through regulation and guidance. The PPACA effects all aspects

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of the health care delivery and reimbursement system in the United States, including health insurers, managed care organizations, health care providers, employers, and U.S. states and territories.
     The implementation of PPACA could have a material adverse effect on the profitability or marketability of our business, financial condition and results of operations. Because of the absence of the anticipated regulations and guidance, we are not able to fully assess the impact of the PPACA on us at this time and we will continue to assess its impact on us as these regulations and guidance are issued.
     Some of the more significant PPACA issues that may affect our managed care business (including our Commercial, Medicare and Medicaid sectors) include:
  Provisions requiring greater access to coverage for certain uninsured and under-insured populations and the elimination of certain underwriting practices without adequate funding to health plans or other negative financial levy on health plans such as restrictions in ability to charge additional premium for additional risk, including but not limited to provisions: (i) extending dependent coverage for unmarried individuals until age 26 under their parents’ health coverage, (ii) limiting a health plan’s ability to rescind coverage and restrict the plan’s ability to establish annual and lifetime financial caps, and (iii) limiting a health plan’s ability to deny or limit coverage on grounds of a person’s pre-existing medical condition;
 
  Provisions restricting medical loss ratios and imposing significant penalties for non-compliance;
 
  Provisions requiring health plans to report to their members and the United States Department of Health and Human Services (“HHS”) certain quality performance measures and their wellness promotion activities;
 
  Provisions that freeze premium payments to Medicare Advantage health plans beginning in 2011 and that tie such premium to the local Medicare fee for service costs. The adjustment will be phased in over between 3 and 7 years depending on the amount of the eventual adjustment;
 
  Provisions that tie Medicare Advantage premiums to achievement of certain quality performance measures;
 
  Other efforts or specific legislative changes to the Medicare and Medicaid programs, including changes in the bidding process, authority of the Centers for Medicare and Medicaid Services (“CMS”) to deny bids, or other means of materially reducing premiums such as through further adjustments to the risk adjustment methodology;
 
  Increased federal funding to the Reform program available for years 2014 — 2019;
 
  Funding provided to the Commonwealth of Puerto Rico to either establish health insurance exchanges or fund the Puerto Rico Medicaid program at the discretion of the Governor;
 
  Increased government funding to enforcement agencies and/or changes in interpretation or application of fraud and abuse laws;
 
  Expanded scope of authority and/or funding to audit Medicare Advantage health plans and recoup premiums or other funds by the government or its representatives; and
 
  The increase in persons eligible for coverage under the Medicaid program in Puerto Rico may result in some persons currently insured by us in our Commercial programs becoming eligible for, and thus moving to, the Medicaid program.
     The constitutionality of the PPACA is being challenged by a number of states in the U.S. District Courts in Florida and Virginia. We will continue to assess the impact of these state challenges on the PPACA as they develop.
     For a further description of our Business and other Risk Factors, see Items 1 and 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2009. The information included in this section supplements those materials as to: Item 1. Business sections “Regulation”, “Federal Regulation”, and “Legislative and Regulatory Initiatives”; and Item 1A. Risk Factors section “Risks Relating to the Regulation of Our Industry — Changes in governmental regulations, or the application thereof, may adversely affect our business, financial condition and results of operations.”

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Commonwealth of Puerto Rico Healthcare Reform Contracts (Medicaid)
     On August 31, 2010, the Puerto Rico Health Insurance Administration notified our managed care subsidiary, TSS, that the proposal submitted by TSS to provide services to the Medicaid population was not selected. The current contracts expired by their own terms on September 30, 2010. Total Medicaid enrollment as of September 30, 2010 was 544,448 members. The Medicaid premiums earned, net during the nine months ended September 30, 2010 and 2009 amounted to $273.1 million and $257.7 million, respectively. The operating income for the Medicaid business during the nine months ended September 30, 2010 and 2009 amounted to $5.0 million and $13.7 million, respectively.
Recent Accounting Standards
     For a description of recent accounting standards, see note 2 to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.
Managed Care Membership
                 
    As of September 30,  
    2010     2009  
Managed care enrollment:
               
Commercial 1
    737,697       745,933  
Medicaid 2
    544,448       537,414  
Medicare 3
    64,190       69,290  
 
           
Total
    1,346,335       1,352,637  
 
           
 
Managed care enrollment by funding arrangement:
               
Fully-insured
    900,498       890,987  
Self-insured
    445,837       461,650  
 
           
Total
    1,346,335       1,352,637  
 
           
 
(1)   Commercial membership includes corporate accounts, self-funded employers, individual accounts, Medicare Supplement, U.S. Federal government employees and local government employees.
 
(2)   Includes rated and self-funded members.
 
(3)   Includes Medicare Advantage as well as stand-alone PDP plan membership.

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Consolidated Operating Results
     The following table sets forth the Corporation’s consolidated operating results. Further details of the results of operations of each reportable segment are included in the analysis of operating results for the respective segments.
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
(Dollar amounts in millions)   2010     2009     2010     2009  
Revenues:
                               
Premiums earned, net
  $ 496.5       476.3     $ 1,493.4       1,390.7  
Administrative service fees
    10.2       9.8       34.9       30.0  
Net investment income
    12.8       12.9       37.9       38.9  
 
                       
Total operating revenues
    519.5       499.0       1,566.2       1,459.6  
 
                       
Net realized investment gains (losses)
    (0.3 )     2.1       (0.3 )     (1.2 )
Net unrealized investment gain on trading securities
    4.6       4.9       0.6       8.1  
Other income, net
    0.6       0.1       0.4       0.4  
 
                       
Total revenues
    524.4       506.1       1,566.9       1,466.9  
 
                       
Benefits and expenses:
                               
Claims incurred
    421.5       412.4       1,272.2       1,201.1  
Operating expenses
    74.1       71.2       227.7       208.1  
 
                       
Total operating expenses
    495.6       483.6       1,499.9       1,409.2  
Interest expense
    3.0       3.4       9.6       10.0  
 
                       
Total benefits and expenses
    498.6       487.0       1,509.5       1,419.2  
 
                       
Income before taxes
    25.8       19.1       57.4       47.7  
Income tax expense
    5.3       1.0       10.7       7.0  
 
                       
Net income
  $ 20.5       18.1     $ 46.7       40.7  
 
                       
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Operating Revenues
     Consolidated premiums earned, net increased by $20.2 million, or 4.2%, to $496.5 million during the three months ended September 30, 2010 when compared to the three months ended September 30, 2009. The increase was mostly due to an increase in the premiums earned, net in our Managed Care segment, primarily from growth in the Commercial membership reflecting organic growth as well as to higher premium rates, particularly in the Commercial and Medicare businesses.
Claims Incurred
     Consolidated claims incurred increased by $9.1 million, or 2.2%, to $421.5 million during the three months ended September 30, 2010 when compared to the claims incurred during the three months ended September 30, 2009. This increase is principally due to increased claims in the Managed Care segment as a result of higher enrollment and an increase in loss adjustment expenses for the Medicaid business. The consolidated loss ratio decreased by 1.7 percentage points to 84.9%.
Operating Expenses
     Consolidated operating expenses during the three months ended September 30, 2010 increased by $2.9 million, or 4.1%, to $74.1 million as compared to the operating expenses during the three months ended September 30, 2009. This increase is primarily attributed to a higher volume of business, particularly in our Managed Care segment, and to expenses related to the implementation of the new Managed Care information technology (“IT”) system. For the three months ended September 30, 2010, the consolidated operating expense ratio remained remained stable at 14.6%.

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Income Tax Expense
     Consolidated income tax expense during the three months ended September 30, 2010 increased by $4.3 million to $5.3 million as compared to the income tax expense during the three months ended September 30, 2009. The consolidated effective tax rate increased by 15.3 percentage points, to 20.5%, primarily due to the use of tax credits during the 2009 period.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Operating Revenues
     Consolidated premiums earned, net increased by $102.7 million, or 7.4%, to $1,493.4 million during the nine months ended September 30, 2010 when compared to the nine months ended September 30, 2009. The increase was primarily due to an increase in the premiums earned, net in our Managed Care segment, primarily from growth in Commercial membership, reflecting, in part, the La Cruz Azul (LCA) transaction, and organic growth as well as higher premium rates, particularly in the Commercial and Medicare businesses.
     The increase in administrative service fees of $4.9 million, or 16.3%, to $34.9 million in the 2010 period, is attributed to a higher self-insured member months enrollment. Increase is mostly due to new self-insured members in our Commercial business primarily as the result of the aforementioned acquisition of LCA, which was effective July 1, 2009.
     Consolidated net investment income decreased by $1.0 million, or 2.6%, to $37.9 million during nine months ended September 30, 2010 mostly as the result of lower yields in fixed income investment acquired during the period.
Net Realized Investment Losses
     Consolidated net realized investment losses of $0.3 million during the 2010 period are the result of other-than-temporary impairments amounting to $2.9 million related to equity and fixed income securities, offset in part by net realized gains from the sale of fixed income and equity securities amounting to $2.6 million.
Net Unrealized Investment Gains on Trading Securities and Other Income, Net
     The combined balance of our consolidated net unrealized investment gain on trading securities and other income, net decreased by $7.5 million, to $1.0 million during the nine months ended September 30, 2010. This decrease is attributable to a lower increase in fair value of our trading securities portfolio as compared to last year’s increase. The unrealized gain experienced on our trading portfolio represents a combined increase of 3.6% in the market value of the portfolio, which compares favorably with the changes experienced by the comparable indexes; the Standard and Poor’s 500 Index increased by 2.3% and the Russell 1000 Growth decreased by 3.1% during this period.
Claims Incurred
     Consolidated claims incurred increased by $71.1 million, or 5.9%, to $1,272.2 million during the nine months ended September 30, 2010 when compared to the claims incurred during the nine months ended September 30, 2009. This increase is principally due to increased claims in the Managed Care segment as a result of higher enrollment. The consolidated loss ratio decreased by 1.2 percentage points to 85.2%.
Operating Expenses
     Consolidated operating expenses during the 2010 period increased by $19.6 million, or 9.4%, to $227.7 million as compared to the operating expenses during the 2009 period. This increase is primarily attributed to a higher volume of business, particularly in our Managed Care segment and expenses related to the implementation of the new Managed Care IT system. The consolidated operating expense ratio reflects an increase of 0.3 percentage point, to 14.9% during 2010.
Income Tax Expense
     Consolidated income tax expense during the nine months ended September 30, 2010 increased by $3.7 million to $10.7 million as compared to the income tax expense during the nine months ended September 30, 2009.

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The consolidated effective tax rate increased by 3.9 percentage points, to 18.6%, primarily due to the use of tax credits during the 2009 period.
Managed Care Operating Results
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
(Dollar amounts in millions)   2010     2009     2010     2009  
Operating revenues:
                               
Medical premiums earned, net:
                               
Commercial
  $ 237.1     $ 217.3     $ 715.0     $ 600.3  
Medicaid
    92.9       89.4       273.1       257.7  
Medicare
    116.4       121.5       354.6       388.6  
 
                       
Medical premiums earned, net
    446.4       428.2       1,342.7       1,246.6  
Administrative service fees
    10.9       10.5       37.1       32.0  
Net investment income
    5.2       5.4       15.2       15.9  
 
                       
Total operating revenues
    462.5       444.1       1,395.0       1,294.5  
 
                       
Medical operating costs:
                               
Medical claims incurred
    397.5       386.5       1,197.6       1,126.4  
Medical operating expenses
    48.6       47.5       149.9       136.0  
 
                       
Total medical operating costs
    446.1       434.0       1,347.5       1,262.4  
 
                       
Medical operating income
  $ 16.4     $ 10.1     $ 47.5     $ 32.1  
 
                       
 
                               
Additional data:
                               
Member months enrollment:
                               
Commercial:
                               
Fully-insured
    1,484,056       1,441,028       4,521,088       3,977,778  
Self-funded
    735,154       812,780       2,239,544       1,954,997  
 
                       
Total Commercial member months
    2,219,210       2,253,808       6,760,632       5,932,775  
 
                       
Medicaid:
                               
Fully-insured
    1,034,749       1,011,294       3,078,288       2,997,800  
Self-funded
    599,648       590,117       1,782,426       1,723,568  
 
                       
Total Medicaid member months
    1,634,397       1,601,411       4,860,714       4,721,368  
 
                       
Medicare:
                               
Medicare Advantage
    165,327       179,878       506,622       565,439  
Stand-alone PDP
    28,014       29,330       84,395       88,301  
 
                       
Total Medicare member months
    193,341       209,208       591,017       653,740  
 
                       
Total member months
    4,046,948       4,064,427       12,212,363       11,307,883  
 
                       
 
                               
Medical loss ratio
    89.0 %     90.3 %     89.2 %     90.4 %
 
                               
Operating expense ratio
    10.6 %     10.8 %     10.9 %     10.6 %
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Medical Operating Revenues
     Medical premiums earned for the three months ended September 30, 2010 increased by $18.2 million, or 4.3%, to $446.4 million when compared to the medical premiums earned during the three months ended September 30, 2009. This increase is principally the result of the following:
  Medical premiums generated by the Commercial business increased by $19.8 million, or 9.1%, to $237.1 million during the three months ended September 30, 2010. This fluctuation is primarily the result of an increase in member months enrollment by 43,028, or 3.0%, and an increase in average premium rates in rated group policies of approximately 7.6%. Increase in member months was primarily attributed to new groups acquired during the period.

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  Medical premiums earned in the Medicaid business increased by $3.5 million, or 3.9%, to $92.9 million during the three months ended September 30, 2010. This fluctuation is due to an increase in member months enrollment in the fully-insured membership by 23,455, or 2.3%, as well as to an average increase in premiums rates of 4.8% that was effective September 1st, 2010.
 
  Medical premiums generated by the Medicare business decreased during the three months ended September 30, 2010 by $5.1 million, or 4.2%, to $116.4 million. This fluctuation is the result of an overall decrease in the member months enrollment of this business by 15,867, or 7.6%, when compared with the same period in 2009, mostly reflected in our dual-eligible product. This decrease in member month enrollment is offset in part by higher average premium rates, particularly in our dual eligible product, and to higher CMS risk score adjustment for the 2010 period as compared to 2009. The three months ended September 30, 2010 and 2009 include the net effect of approximately $1.8 million and $0.9 million, respectively of risk score adjustments corresponding to prior periods.
Medical Claims Incurred
     Medical claims incurred during the three months ended September 30, 2010 increased by $11.0 million, or 2.8%, to $397.5 million when compared to the three months ended September 30, 2009. The medical loss ratio (“MLR”) of the segment decreased 1.3 percentage points during the 2010 period, to 89.0%. These fluctuations are primarily attributed to the effect of the following:
  The medical claims incurred of the Commercial business increased by $12.0 million, or 6.2%, during the 2010 period and its MLR decreased by 2.3 percentage points. The increase in claims relates primarily to the increase in member months enrollment experienced during the 2010 period. The lower MLR is primarily due to the effect of prior period reserve developments in the 2010 and 2009 periods. Excluding the effect of prior period reserve developments, the MLR decreased by 1.1 percentage points, mostly resulting from a higher overall trend in premium rate increases as compared to cost trends as well as to lower utilization trends in 2010.
 
  The medical claims incurred of the Medicaid business increased by $4.7 million, or 5.8%, and its MLR increased by 1.7 percentage points during the three months ended September 30, 2010. The increase in MLR is primarily due to the effect of prior period reserve developments in the 2010 and 2009 periods and an increase in loss adjustment expenses. This increase was offset in part by the 2009 premium adjustment to provide for unresolved reconciling items with the Government of Puerto Rico. Excluding the effect of these items in the 2010 and 2009 periods, the MLR increased 5.0 percentage points mostly resulting from lower premium yields during the 2010 period due to the extension of the prior year’s contract with the government without premium rate increases until September 2010.
 
  The medical claims incurred of the Medicare business decreased by $5.7 million, or 5.3% during the 2010 period primarily due to a lower membership and its MLR was 89.3%, 1.1 percentage points lower than the MLR for same period of the prior year. Excluding the effect of prior period reserve developments in the 2010 and 2009 period and risk-score premium adjustments, the MLR increased by 1.0 percentage points primarily the result of higher utilization trends in our non-dual product.
Medical Operating Expenses
     Medical operating expenses for the three months ended September 30, 2010 increased by $1.1 million, or 2.3%, to $48.6 million when compared to the three months ended September 30, 2009. This increase is mainly due to the higher volume of business associated to the increased enrollment in the 2010 quarter and costs related to the implementation of the new IT system, including information systems consultants and depreciation and amortization expense, which increased by approximately $1.7 million and $1.4 million, respectively. These increases were offset in part by a decrease of approximately $2.1 in contingent property tax accrual during the 2010 period as the result of the benefit provided by an incentive program established by the government which waives accumulated interest, penalties and surcharges. The operating expense ratio decreased by 0.2 percentage points, from 10.8% in 2009 to 10.6% in 2010.

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Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Medical Operating Revenues
     Medical premiums earned for the nine months ended September 30, 2010 increased by $96.1 million, or 7.7%, to $1,342.7 million when compared to the medical premiums earned during the nine months ended September 30, 2009. This increase is principally the result of the following:
  Medical premiums generated by the Commercial business increased by $114.7 million, or 19.1%, to $715.0 million during the nine months ended September 30, 2010. This fluctuation is primarily the result of an increase in member months enrollment by 543,310, or 13.7%, and an increase in average premium rates in rated group policies of approximately 6.1%. Increase in member months was attributed to new members acquired from LCA effective July 1, 2009, which represent approximately 35.1% of the increase in member months enrollment experienced during 2010, and to new groups acquired during the period.
 
  Medical premiums earned in the Medicaid business increased by $15.4 million, or 6.0%, to $273.1 million during the nine months ended September 30, 2010. This fluctuation is due to an increase in the member months enrollment in the fully-insured membership by 80,488, or 2.7%. In addition, the 2009 period includes a premium reduction adjustment of approximately $8.0 million to provide for unresolved reconciling items with the Government of Puerto Rico. The average premiums rates of this business were increased by 4.8% effective September 1st, 2010.
 
  Medical premiums generated by the Medicare business decreased by $34.0 million, or 8.7%, to $354.6 million, primarily due to a decrease in member month enrollment of 62,723, or 9.6%, when compared with the same period in 2009. The fluctuation in premiums also results from a lower final risk score adjustments received from CMS in 2010 as compared to 2009. The nine months ended September 30, 2010 and 2009 include the net effect of approximately $3.0 million and $9.2 million, respectively, related to CMS risk score adjustments corresponding to prior periods. These fluctuations were offset in part by higher average premium rates, particularly in our dual eligible product.
     Administrative service fees increased by $5.1 million, or 15.9%, to $37.1 million during the 2010 period, mainly due to an increase in self-funded member months enrollment of 343,405, or 9.3%. Increase in members is mainly the result of the contracts acquired from LCA effective July 1, 2009.
Medical Claims Incurred
     Medical claims incurred during the nine months ended September 30, 2010 increased by $71.2 million, or 6.3%, to $1,197.6 million when compared to the nine months ended September 30, 2009. The MLR of the segment decreased 1.2 percentage points during the 2010 period, to 89.2%. These fluctuations are primarily attributed to the effect of the following:
  The medical claims incurred of the Commercial business increased by $98.8 million, or 18.1%, during the 2010 period and its MLR decreased by 0.7 percentage points. The increase in claims relates primarily to the increase in member months enrollment of 543,310, or 13.7%. The lower MLR primarily results from a higher overall trend in premium rate increases as compared to cost trends as well as to lower utilization trends in 2010.
 
  The medical claims incurred of the Medicaid business increased by $25.4 million, or 11.0%, during the 2010 period and its MLR increased by 4.2 percentage points during the nine months ended September 30, 2010, to 94.1%. The MLR of this business is affected by the 2009 premium adjustment to provide for unresolved reconciling items with the Government of Puerto Rico and prior period reserve developments. Considering the effect of these items in the 2009 and 2010 periods, the MLR increased by 2.8 percentage points during the 2010 period, mostly resulting from a lower premium yield due to the extension of the prior year’s contract with the government without premium rate increases until September 2010.
 
  The medical claims incurred of the Medicare business decreased by $53.0 million, or 15.2%, during the 2010 period primarily due to lower membership and MLR. The MLR was 83.6%, 6.4 percentage points lower than the MLR for same period in 2009. The lower MLR mostly results from the effect of prior period reserve developments in 2010 and 2009 and risk score premium adjustments. Excluding the effect of prior period reserve developments in the 2010 and 2009 period and risk-score premium adjustments, the MLR decreased by 3.4 percentage points mostly as the result of higher premium rates and lower utilization in our Medicare products and a new risk-sharing arrangement with our providers in the dual-eligible product.

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Medical Operating Expenses
     Medical operating expenses for the nine months ended September 30, 2010 increased by $13.9 million, or 10.2%, to $149.9 million when compared to the nine months ended September 30, 2009. This increase is mainly due to the higher volume of business associated to the higher enrollment and costs related to the implementation of the new IT system. The operating expense ratio increased by 0.3 percentage points, from 10.6% in 2009 to 10.9% in 2010. The higher operating expense ratio is primarily the result of expenses related to the implementation of the new IT system, including information systems consultants and depreciation and amortization expense, which, increased by approximately $1.8 million and $3.1 million, respectively, when compared to the 2009 period expenses; and approximately $1.1 million in expenses related to a new product launched during January 2010. In addition, the asset purchase amortization related to the LCA acquisition was approximately $1.0 million higher than during the 2009 period. In the 2009 period a contingent property tax accrual of approximately $7.5 million was recorded, offset in part by the effect of $3.6 million related to the settlement of an insurance recovery receivable of legal expenses. This contingent property tax accrual was decreased by approximately $2.1 million during the 2010 period as the result of the benefit provided by an incentive program established by the government which waives accumulated interest, penalties and surcharges.
Life Insurance Operating Results
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
(Dollar amounts in millions)   2010     2009     2010     2009  
Operating revenues:
                               
Premiums earned, net:
                               
Premiums earned
  $ 28.1     $ 26.2     $ 82.9     $ 79.1  
Premiums earned ceded
    (1.4 )     (1.5 )     (4.2 )     (4.6 )
 
                       
Premiums earned, net
    26.7       24.7       78.7       74.5  
Net investment income
    4.5       4.1       12.9       12.5  
 
                       
Total operating revenues
    31.2       28.8       91.6       87.0  
 
                       
Operating costs:
                               
Policy benefits and claims incurred
    12.8       12.2       37.1       37.9  
Underwriting and other expenses
    13.8       12.6       41.4       38.2  
 
                       
Total operating costs
    26.6       24.8       78.5       76.1  
 
                       
Operating income
  $ 4.6     $ 4.0     $ 13.1     $ 10.9  
 
                       
 
                               
Additional data:
                               
Loss ratio
    47.9 %     49.4 %     47.1 %     50.9 %
Operating expense ratio
    51.7 %     51.0 %     52.6 %     51.3 %
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Operating Revenues
     Premiums earned, net for the three months ended September 30, 2010 increased by $2.0 million, or 8.1% to $26.7 million when compared to the three months ended the September 30, 2009. Such increase is primarily related to higher sales in the Cancer Protection line of business.
Policy Benefits and Claims Incurred
     Policy benefits and claims incurred for the three months ended September 30, 2010 increased by $0.6 million, or 4.9%, to $12.8 million when compared to the three months ended September 30, 2009, mostly resulting from the higher volume experienced in the Cancer Protection line of business. The loss ratio for the period improved from 49.4% in 2009 to 47.9% in 2010, or 1.5 percentage points. The lower loss ratio is primarily the result of lower death benefits incurred during this period as compared to 2009.

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Underwriting and Other Expenses
     Underwriting and other expenses for the three month period ended September 30, 2010 increased $1.2 million, or 9.5%, to $13.8 million when compared to the three months ended September 30, 2009. The increase is mostly related to a higher amortization of deferred policy acquisition costs. The increased operating expenses resulted in a higher operating expense ratio, which increased by 0.7 percentage points from 51.0% in 2009 to 51.7% in 2010.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Operating Revenues
     Premiums earned, net increased by $4.2 million, or 5.6% to $78.7 million during the nine months ended September 30, 2010 primarily as the result of higher sales in the Cancer Protection and Individual Life lines of business, which increased by $2.4 and $1.8 million, respectively.
Policy Benefits and Claims Incurred
     Policy benefits and claims incurred decreased by $0.8 million, or 2.1%, to $37.1 million during the nine months ended September 30, 2010. This decrease is mostly related to a reduction in the change in the liability for future policy benefits when compared to the same period in 2009 resulting from a change in the mix of business subscribed by the segment. As a result of the reduction in policy benefits, the loss ratio improved by 3.8 percentage points, from 50.9% in 2009 to 47.1% in 2010.
Underwriting and Other Expenses
     Operating expenses increased $3.2 million, or 8.4%, to $41.4 million during the nine months ended September 30, 2010. The increase is mostly related to a higher amortization of deferred policy acquisition costs. The higher operating expenses increased the operating expense ratio by 1.3 percentage points, from 51.3% in 2009 to 52.6% in 2010.
Property and Casualty Insurance Operating Results
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
(Dollar amounts in millions)   2010     2009     2010     2009  
Operating revenues:
                               
Premiums earned, net:
                               
Premiums written
  $ 40.7     $ 40.1     $ 111.5     $ 110.8  
Premiums ceded
    (17.4 )     (15.5 )     (46.7 )     (45.0 )
Change in unearned premiums
    1.2       (0.2 )     10.4       7.2  
 
                       
Premiums earned, net
    24.5       24.4       75.2       73.0  
Net investment income
    2.6       3.0       8.2       8.8  
 
                       
Total operating revenues
    27.1       27.4       83.4       81.8  
 
                       
Operating costs:
                               
Claims incurred
    11.2       13.7       37.5       36.9  
Underwriting and other expenses
    13.7       13.5       42.6       40.5  
 
                       
Total operating costs
    24.9       27.2       80.1       77.4  
 
                       
Operating income
  $ 2.2     $ 0.2     $ 3.3     $ 4.4  
 
                       
 
                               
Additional data:
                               
Loss ratio
    45.7 %     56.1 %     49.9 %     50.5 %
Operating expense ratio
    55.9 %     55.3 %     56.6 %     55.5 %
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Operating Revenues
     Total premiums written during the three months ended September 30, 2010 increased by $0.6 million, or 1.5%, to $40.7 million, mostly resulting from new sales in the Commercial Multi-Peril and General Liability lines of

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business. The commercial business continues under soft market conditions, thus reducing premium rates and increasing competition for renewals and new business.
     Premiums ceded to reinsurers during the three months ended September 30, 2010 increased by approximately $1.9 million, or 12.3% to $17.4 million. The ratio of premiums ceded to premiums written increased by 3.8 percentage points, from 38.7% in 2009 to 42.5% in 2010, mostly due to an increase in facultative reinsurance cessions, which represented 5.2 percentage points of the increase experienced during 2010. This was partially offset by a decrease in the Commercial and Personal lines quota share treaties of 3.0 and 2.2 percentage points, respectively.
     The change in unearned premiums presented an increase of $1.4 million, to $1.2 million during the three months ended September 30, 2010, primarily as the result of the amortization of premiums written in prior periods.
Claims Incurred
     Claims incurred during the three months ended September 30, 2010 decreased by $2.5 million, or 18.2%, to $11.2 million. The loss ratio decreased by 10.4 percentage points, to 45.7% during the three months ended September 30, 2010 as a result of favorable loss experience in the Commercial Multi-Peril, Commercial Auto and Dwelling and Property Monoline lines of business resulting from lower claim amounts in the claims reported during the current period.
Underwriting and Other Expenses
     Underwriting and other operating expenses for the three months ended September 30, 2010 increased by $0.2 million, or 1.5%, to $13.7 million. The operating expense ratio increased by 0.6 percentage points during the same period, to 55.9% in 2010. This fluctuation is primarily due to an increase of $0.1 million in net commission mostly driven by the higher premium volume during this quarter.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Operating Revenues
     Total premiums written during the nine-month period ended September 30, 2010 increased by $0.7 million, or 0.6%, to $111.5 million. This fluctuation is primarily due to increases in the General Liability, Personal Auto and Dwelling and Commercial Property Mono-Line lines of business, partially offset by decreases in premiums written in the Medical Malpractice and Commercial Multi-Peril lines of business.
     Premiums ceded to reinsurers during the nine months ended September 30, 2010 increased by approximately $1.7 million, or 3.8%, to $46.7 million. The ratio of premiums ceded to premiums written increased by 1.3 percentage points, from 40.6% in 2009 to 41.9% in 2010. This fluctuation results from higher facultative reinsurance cessions, which represented 1.9 percentage points of the increase experienced during the period. This was partially offset by a decrease in the reinsurance rates for the quota share contracts for commercial and personal property insurance risks by 3.0 and 2.2 percentage points, respectively.
     The change in unearned premiums presented an increase of $3.2 million, to $10.4 million during the nine months ended September 30, 2010, primarily as the result of the result of the lower volume of premiums written when compared to the premiums written during the last six months of the year ended December 31, 2009.
Claims incurred
     Claims incurred during the nine months ended September 30, 2010 increased by $0.6 million, or 1.6%, to $37.5 million. The loss ratio decreased by 0.6 percentage points, to 49.9% during the nine months ended September 30, 2010, primarily due to favorable loss experience in the Dwelling and Property Monoline, the Medical Malpractice and the Personal Auto lines of business.
Underwriting and other expenses
     Underwriting and other operating expenses for the nine months ended September 30, 2010 increased by $2.1 million, or 5.2%, to $42.6 million. This increase is primarily due to higher net commissions by approximately $1.4 million due to a higher amortization of deferred acquisition costs due to the lower volume experienced in the 2010 period. The operating expense ratio increased by 1.1 percentage points, from 55.5% in 2009 to 56.6% in 2010.

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Liquidity and Capital Resources
Cash Flows
     A summary of our major sources and uses of cash for the periods indicated is presented in the following table:
                 
    Nine months ended  
    September 30,  
(Dollar amounts in millions)   2010     2009  
Sources of cash:
               
Cash provided by operating activities
  $ 87.0     $ 66.7  
Proceeds from policyholder deposits
    7.7       3.7  
 
           
Total sources of cash
    94.7       70.4  
 
           
 
               
Uses of cash:
               
Net purchases of investment securities
    (59.4 )     (6.8 )
Capital expenditures
    (13.7 )     (14.7 )
Repurchase and retirement of common stock
          (22.0 )
Payments of long-term borrowings
    (1.2 )     (1.2 )
Surrenders of policyholder deposits
    (7.6 )     (4.9 )
Other
    (2.5 )     (12.2 )
 
           
Total uses of cash
    (84.4 )     (61.8 )
 
           
Net increase in cash and cash equivalents
  $ 10.3     $ 8.6  
 
           
     Cash flow from operating activities increased by $20.3 million for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009, principally due to the effect of an increase in premiums collected of $81.8 and a decrease in income taxes paid of $13.6. These fluctuations were offset in part by an increase in claims paid of $59.8 million and an increase in cash paid to suppliers and employees of $4.4 million. The increase in claims paid and in premiums collected is primarily the result of higher volume in our Managed Care segment, mainly in the member months enrollment of the Commercial business.
     Net acquisition of investment securities increased by $52.6 million during the nine months ended September 30, 2010, when compared to same period the prior year primarily as the result of the purchase of investments classified as available-for-sale with cash generated from operations.
     The decrease in the other uses of cash of $9.7 million is attributed to changes in the amount of outstanding checks over bank balances in the 2010 period.
     On December 8, 2008 we announced the immediate commencement of a $40.0 million share repurchase program. We paid approximately $22.0 million under the stock repurchase program during the nine months ended September 30, 2009. This share repurchase program was completed in December 1, 2009.
Share Repurchase Program
     On September 29, 2010, we announced the immediate commencement of a $30.0 million share repurchase program. The program will be conducted using available cash through open-market purchases and privately-negotiated transactions of Class B shares only, in accordance with Rules 10b-18 and 10b5-1 under the Securities Exchange Act of 1934, as amended. During the three months ended September 30, 2010 we repurchased and retired 24,400 shares at an average per share price of $16.61, for an aggregate cost of $0.4 million. At September 30, 2010 these shares repurchases remained unsettled and were included within the accounts payable and accrued liabilities in the accompanying consolidated balance sheet.
Financing and Financing Capacity
     We have several short-term facilities available to address timing differences between cash receipts and disbursements. These short-term facilities are mostly in the form of arrangements to sell securities under repurchase agreements. As of September 30, 2010, we had $110.0 million of available credit under these facilities.
     As of September 30, 2010, we had the following senior unsecured notes payable:
  On January 31, 2006, we issued and sold $35.0 million of our 6.7% senior unsecured notes payable due January 2021 (the 6.7% notes).

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  On December 21, 2005, we issued and sold $60.0 million of our 6.6% senior unsecured notes due December 2020 (the 6.6% notes). During September 2010, we entered into an agreement to purchase $25.0 million of this note on October 1, 2010. For additional information refer to note 7 of the unaudited consolidated financial statements.
 
  On September 30, 2004, we issued and sold $50.0 million of our 6.3% senior unsecured notes due September 2019 (the 6.3% notes).
     The 6.3% notes, the 6.6% notes and the 6.7% notes contain certain non-financial covenants. At September 30, 2010, we and our managed care subsidiary, as applicable, are in compliance with these covenants.
     In addition, we are a party to a secured term loan with a commercial bank in Puerto Rico. This secured loan bears interest at a rate equal to the London Interbank Offered Rate (LIBOR) plus 100 basis points and requires monthly principal repayments of $0.1 million. As of September 30, 2010, this secured loan had an outstanding balance of $21.4 million and average annual interest rate of 1.37%.
     This secured loan is guaranteed by a first lien on our land, buildings and substantially all leasehold improvements, as collateral for the term of the agreements under a continuing general security agreement. This secured loan contains certain non-financial covenants that are customary for this type of facility, including, but not limited to, restrictions on the granting of certain liens, limitations on acquisitions and limitations on changes in control. As of September 30, 2010 we are in compliance with these covenants. Failure to meet these covenants may trigger the accelerated payment of the secured loan’s outstanding balance.
     We anticipate that we will have sufficient liquidity to support our currently expected needs.
     Further details regarding the senior unsecured notes and the credit agreements are incorporated by reference to “Item 7.—Management Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2009.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
     We are exposed to certain market risks that are inherent in our financial instruments, which arise from transactions entered into in the normal course of business. We have exposure to market risk mostly in our investment activities. For purposes of this disclosure, “market risk” is defined as the risk of loss resulting from changes in interest rates and equity prices. No material changes have occurred in our exposure to financial market risks since December 31, 2009. A discussion of our market risk is incorporated by reference to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2009.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
     In connection with the preparation of this Quarterly Report on Form 10-Q, management, under the supervision and with the participation of the chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (as such term is defined under Exchange Act Rule 13a-15(e)). Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility that judgments in decision-making can be faulty, and breakdowns as a result of simple errors or mistake. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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     Based on this evaluation, our chief executive officer and chief financial officer have concluded that as of September 30, 2010, which is the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to a reasonable level of assurance.
     There were no significant changes in our disclosure controls and procedures, or in factors that could significantly affect internal controls, subsequent to the date the chief executive officer and chief financial officer completed the evaluation referred to above.
Changes in Internal Controls Over Financial Reporting
     No changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended September 30, 2010 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II — Other Information
Item 1. Legal Proceedings
     For a description of legal proceedings, see note 14 to the unaudited consolidated financial statements included in this quarterly report on Form 10-Q.
Item 1A. Risk Factors
     For a description of our risk factors see Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2009. See also section “Recent Developments — Federal Health Reform Legislation” in Item 2 of Part I of this Quarterly Report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer
     The following table presents information related to our repurchases of common stock for the period indicated:
                                 
                    Total Number     Approximate  
                    of Shares     Dollar Value  
                    Purchased as     of Shares that  
    Total             Part of     May Yet Be  
    Number of     Average     Publicly     Purchased  
(Dollar amounts in millions, except   Shares     Price Paid     Announced     Under the  
per share data)   Purchased     per Share     Programs1     Programs  
September 1, 2010 to September 30, 2010
    24,400     $ 16.61       24,400     $ 29.6  
 
1   On September 29, 2010, the Board of Directors authorized the immediate commencement of a $30.0 million share repurchase program of Class B shares only.
Item 3. Defaults Upon Senior Securities
     Not applicable.
Item 4. (Removed and Reserved)
Item 5. Other Information
     Not applicable.

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Item 6. Exhibits
     
Exhibits   Description
Exhibit 3(ii)
  Amended and Restated Bylaws of Triple-S Management Corporation (incorporated herein by reference to Exhibit 3.1 to TSM’s Current Report on Form 8-K filed on June 11, 2010 (File No. 001-33865)).
 
   
Exhibit 10.1
  Extension to the agreement between the Puerto Rico Health Insurance Administration and TSS for the provision of health insurance coverage to eligible population in the North and South-West Regions until June 30, 2010 (incorporated herein by reference to Exhibit 10.1 to TSM’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (File No. 001-33865)).
 
   
Exhibit 10.2
  Extension to the agreement between the Puerto Rico Health Insurance Administration and TSS to act as third party administrator in the Metro-North Region until September 30, 2010 (incorporated herein by reference to Exhibit 10.1 to TSM’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (File No. 001-33865)).
 
   
Exhibit 10.3
  Extension to the agreement between the Puerto Rico Health Insurance Administration and TSS for the provision of health insurance coverage to eligible population in the North and South-West Regions until September 30, 2010 (incorporated herein by reference to Exhibit 10.1 to TSM’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (File No. 001-33865)).
 
   
Exhibit 10.4*
  Amendment to the Medicare Platino Contract (Medicare Wraparound) between the Puerto Rico Health Insurance Administration and TSS for the provision of wraparound coverage to health insurance dual-eligible population until December 31, 2011.
 
   
11
  Statement re computation of per share earnings; an exhibit describing the computation of the earnings per share for the three months and six months ended September 30, 2010 and 2009 has been omitted as the detail necessary to determine the computation of earnings per share can be clearly determined from the material contained in Part I of this Quarterly Report on Form 10-Q.
 
   
31.1*
  Certification of the President and Chief Executive Officer required by Rule 13a-14(a)/15d-14(a).
 
   
31.2*
  Certification of the Vice President of Finance and Chief Financial Officer required by Rule 13a-14(a)/15d-14(a).
 
   
32.1*
  Certification of the President and Chief Executive Officer required pursuant to 18 U.S.C Section 1350.
 
   
32.2*
  Certification of the Vice President of Finance and Chief Financial Officer required pursuant to 18 U.S.C Section 1350.
     All other exhibits for which provision is made in the applicable accounting regulation of the United States Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
 
*   Filed herein.

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SIGNATURES
     Pursuant to the requirements of the United States Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  Triple-S Management Corporation
Registrant
 
 
Date: November 9, 2010  By:   /s/ Ramón M. Ruiz-Comas    
    Ramón M. Ruiz-Comas, CPA   
    President and
Chief Executive Officer
 
 
     
Date: November 9, 2010  By:   /s/ Juan J. Román    
    Juan J. Román, CPA   
    Vice President of Finance
and Chief Financial Officer
Principal Accounting Officer
 
 

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